My wife and I regularly watch movies we download (already in mp.4 format at VGA resolution) from a website. Most actually look great, albeit slightly grainy and pixelated at times. The audio is usually very good as it is obtained from a 3.5mm plug purposed for assisting the hearing-impaired.
I remember reading that the X would not play copy-protected content, so I was relieved to be able to play these movies and tv episodes. Yes it plays slideshows, pictures, and videos from the gallery VERY well. I'm especially impressed with the HD video recording quality, and the ease and quality of playback over a large monitor using HDMI.
No Blockbuster can't be outputted, neither can Youtube. In the future, custom roms and or kernals could change this and give us complete access to the port the way it should have been to begin with.
How sick would it be to blutletooth a Wii controller and play Quake 3 on a huge tv with the X! Software can always change, at least we have the hardware to support these things.