Yes, I figured that was the culprit. Videos do play when the "convert when necessary" is off. But is it supposed to work? Conversion?
Yes but the "convert when necessary" is tuned mostly to the PS3 and xbox 360. If the renderer is something else, it will only assume mpeg2's will play without conversion. The important thing is what the encoder is set to. Most devices should be able to play video transcoded to the high bandwidth mpeg2 stream or the dvd mpeg2 stream.
The xbox requires wmv transcoding, others can use mpeg4 however the mpeg4 conversions aren't playable until the conversion finishes.