There are two ways you can watch videos on your Xbox 360:
1. Download video from the Xbox Live Marketplace. Some of these videos are available for free while you may have to pay for others. Microsoft is in control of what videos are available through the Xbox Live Marketplace.
2. Stream videos from your Windows Media Center PC by using your Xbox 360 as a Media Center Extender. You are in control of what videos you want to watch, however there are restrictions on what kind of video you can playback. See below for more details
No. Without a Windows XP Media Center PC, you can only play back the movies Microsoft offers in the Xbox Live Marketplace.
Yes. You will either need the optional Xbox 360 Hard Drive to download/watch video from the Xbox Live Marketplace or you will need a PC with Microsoft Windows XP Media Center as your OS in order to stream video from your PC.
No. There are video sharing capabilities built into Windows Media Connect, however, Microsoft has chosen to ONLY allow you to share Audio and Pictures through Windows Media Connect. You CANNOT stream videos through Windows Media Connect to your Xbox 360
Microsoft Windows Media Video (WMV) 7, 8, & 9
WMV Image 1 & 2
MPEG-1
MPEG-2, DVR-MS
No. The Media Center Extender in the Xbox 360 only supports playback of DVR-MS, MPEG-1, MPEG-2 and WMV video.
You have to convert these videos into the video format the Xbox 360 Media Center Extender can playback. Videora Xbox 360 Converter can do this for you.
No.
No, you can only watch DVDs by using the Xbox360's DVD drive.
No. This functionality is not available in through the Xbox 360's Media Center Extender. You can only watch one DVD at a time by using the Xbox360's DVD drive.
"No. We did not implement the ability to remotely play back a DVD from a MCE to an XBox 360 Extender so it did not make sense to make My DVDs available. I certainly understand how cool it would be if you could put your MCE and full loaded DVD changer in a closest and use XBox 360's to watch your DVD collection from any room wirelessly but this is something that's going to have to wait until a future release." - Matt Goyer - MCE Program Manager
Yes, but only video downloaded from the Xbox Live Marketplace or preloaded on the Xbox, not your own videos.
No.