VLC has its own codecs & stuff "embedded", so it's not affected by the Windows' problems. MC, if you use a recent version, should also run smoothly, as RO ST works in a similar way. The fact that streaming video is ok but local files are not is a telling sign, but I'm not savvy enough to read it. It seems like a splitter or DirectX issue (?).
To eliminate possible factors, are you sure you've not left some advanced setting active in your Options>Video>Video mode ?
To cheer you up, if no alternative is found, I think you can still call VLC to play your files from inside the Theater view.