According to Kotaku, the latest firmware 2.00 update may have updated the video compatibility in the PS3.
Prior to firmware 2.00, Kotaku stated that when connecting their PC to the PS3, it only detected two MPEG video files. However, post 2.00, all Xvid and Divx files appeared as options on their PS3.
Now the files still won’t work on the PlayStation 3, but this new find may lead us to believe Sony is planning to support both Xvid and Divx files in the future. My guess is that Sony may be doing this so that when Home is launched, users can convert their files to Divx (for smaller file sizes) and use them to display in their Home studios.
Divx is well known in the Internet world for its ability to compress lengthy video to smaller storage sizes, without losing visual quality. Xvid (Divx spelled backwards) is a direct competitor to Divx, providing similar compression features and supporting MPEG 4 and H.263 video formats.
If Sony plans to fully support these video formats, this will help when importing videos into your PlayStation Home, as they will upload faster without losing quality.
Stay tuned for an official statement from Sony.