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if you use a program that converts on the fly (like tversity), then yes. but if you use windows media player 11 (like me), it doesn't. all it does is stream the file as it is.

i prefer using my ps3 for media as it stores them on my hdd, so i use that much more often than the 360, which i only use for media when a select few media files won't work on my ps3. in my opinion, ps3 is a better media center, as files are allowed to be stored locally, and supports a couple more formats, but avi files are a pain.