If its in mpeg-2 or vc-1 you have to buy a license file before it will decode in the hardware. Its not expensive, but they decided not to include it as not all users would want that capability at a slight increase in price, which given their educational target is fair enough. Theyre not dear, see :-As far as I'm aware it will keep up. I got the type B 512mb Pi . I'm pretty sure some of our stuff is 1080 ( lad is just watching turbo on it soo don't want to disturb him!)
Our tv is only 720...so not sure if that makes any difference(early adopters loose out)
Only things that caused any strangeness playback wise was some home recorded movies from our cameras .it doesn't seem to play all. Think it's due to codecs... mjpg?
It will play isos natively...which was a pleasent surprise.
Just means converting our old stuff before I archive/ play it back on the PI
Regards
Rob