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I have only tried a bit of HD Video playback, but it wasn't too great from what I remember. It might have been my connection or the flash player, but I will try it again and report back my results. At one point when I tried streaming the Real World via MTV.com the video playback stopped while the audio was still going, but since then, I think there has been an update to Adobe Flash player.
 
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I'm kinda disappointed in Youtube playback. Full screen HD playback is not smooth. It's pretty smooth if the UI overlay is not active, but once you tap the screen to bring up the play/pause overlay, the video goes to hell. Not really impressed with that :-( The Vevo app is pretty smooth though. Only problem with that app is that it doesn't rotate.

Edit: after 3.1 update, Youtube playback is smooth. Yay!
 
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It rotates. It just doesn't let you do it! :p

And here's a link to HD videos encoded for HC for anyone who wants to test a non-flash, non-app stream.

Index of /xoom

For the trailers there, I would recommend to give the "full-screen ones a try. Files there were encoded using the Xoom profiles of dvdcat.

For video playback, the Xoom (and likely the Transformer as well, since they share the same os and chip) the video needs to be encoded using baseline H264 video. Quality can go as high as 1920x1080 at 20Mbps or anything less than that. Audio, Stereo AAC. there currently is no way to get it to play 5.1 channel audio (I don't think HDMI outputs 5.1 anyway)
 
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