1 - Because AVI is a container, what you put inside that container is up to the encoder, so if the encoder put a XDIV video inside, WMP doesn't have the necessary decoder to understand what is that. Thats where Codecs come into play
2 - You mean increase its quality? or in size? In size, yes easy (but it decreases quality)
But in quality, like decreasing blur and scanlines etc.. Hard, very hard, thats one of the job of the encoder.. he choses a codec, that have all thoses settings, after that he apply to the video.
But once its done once, its difficult to up the quality..
3 - MKV is another container format like AVI, but the difference it has the capability to hold UNLIMITED numbers of Videos streams, Audio Streams and Subtitles inside. Not only that because it works with streams, you can have the "Soft sub" or a "Dub" on the same file.
But if for the HD videos comming in MKV.. its just has some nift features its open source then its counterpart AVI
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