The Dreamcast itself is just a computer. It can only play the movie types that a program can play. As far as I know, programs exist to play the following media types:
MPEG-1 / Video CD
DivX (the MPEG-4 based video codec, not the crappy crippled DVD format from Circuit City)
A .avi file is not actually any particular type of stream, it's just a standardized format for describing the streams it contains. Thus a .avi could contain MPEG-1, DivX, Indeo, Cinepak, Truemotion, or a bunch of others.
ExCyber, you forgot to mention Sofdec (*.SFD), the most commonly used in DC games AFAIK . It's similar to MPEG-1 in that the audio component used is ADX instead of MPEG-1 Audio Layer II. In most DC games, the bitrate of the video component is much higher than that of a standard MPEG-1 / Video CD; I've seen video bitrates as high as 3.2 Mbps or even 6.4 Mbps (IIRC).
(Edited by MasterAkumaMatata at 8:12 pm on April 2, 2002)