I was under the impression that MC should convert videos on the fly to match the capabilities of the device we are sending to. Is that not the case?
Well it does, if all the DLNA settings are set correctly. I'm not sure if the DLNA capabilities discovery process always gets it right though. Most MC DLNA conversion settings can be marked as "convert if necessary", rather than "always convert". Maybe you should try forcing the output to a known format and see if that makes a difference.
BTW, while I looked at the WD products a while back, I don't have one nor am I using DLNA right at the moment, so I am working from specs and theory rather than recent practice.
What is the best media player, maybe I will just replace them.
That is a million dollar question, which I'm afraid I don't have an answer to, particularly if HD video and audio is involved. There are lots of threads on the forum about it though, and lots talking about various versions of Intel NUCs. But I have yet to see a good answer, particularly when using DLNA. (NUCs can run Windows and so act as a standard MC client, rather than use DLNA.)
I have a Live HD and a Live Hub, and both are having the same problems with DLNA from MC
Both the WD Live HD and Hub are supposed to support Matroska AVC video and of course AAC audio, as shown in your sample file. I'm not sure about the specific Codec ID and Format Profiles though.
Before throwing them out though, I would check they have the latest firmware with all updates. Then, as both have a USB 2.0 input port, I would copy some working and failing mkv videos on to a memory stick and see if they will play on the WDs using the WD interface, and not MC.
If they play from the USB sticks directly on the WDs, then your DLNA setup may be the issue, or a limitation of DLNA itself.
If they don't play, and it is consistent with MC as to which ones play and which ones don't, then it is probably the WDs at fault.
Post up a MediaInfo result for a working MKV file as well please. The devil is in the detail.