It doesn't take much imagination to look down the road and see an Xbox 2 three or four years out, one that's fullycompatible with older games but can also double as a DVD player-recorder and, with the addition of a big hard drive, a personal video recorder.
That said, there are other apps that can handle some AVI and MKV files -- we use MX Player most of the time, and it's almost fullycompatible with the Dynamic Display switch.