Folks, I have had the Droid for two days now and I am a huge video fan. Here are my observations and also referring to the G1 and N900 (same chipset as Droid).
1. Vids above 640X480 do not seem to play unless low bit rates
2. Some vids above 640X480 lock the device up and you have to remove the battery. The same files do not play on the G1 either, but they at least either have sound and no picture or do not load up. I have NEVER had a video lock the G1 up and have to hard reboot.
3. Lower res (480X320) 4:3 vids fill the top and bottom screen, but widescreen vids have borders around the entire display. This suggests very weak scaling options in the Droid's drivers.
N900 scales to correct aspect ratio for lower and higher res vids and plays high res MP4 with no problem. Not to mention Xvid, Divx, WMV, Mpeg, etc. (I know Droid is just MP4)
Given that Droid and the N900 both have the same chipsets, it is obvious that Motorola failed to have video drivers written to use the features of the 3430 chipset and the 2.0 framework does not allow for any improvements either. This device should be eating MP4 for breakfast, but it is choking.
Android and Motorola are holding the video performance back BIG TIME and just like the G1, you have to decode to specific parameters and aspect ratios or the videos will not play or not fit the screen correctly.
Overall still a great device (except for the sd card behind the battery issue), but I prefer the N900 due to better video drivers and more video codecs as well as 32gb built in plus sd card slot.