Richard Leadbetter at Digital Foundry:
Unfortunately, reports that the dashboard video player's 1080p mode has been nerfed appear to be on the money. Video calibration tools put together by the AVSForum demonstrate conclusively that, while the Xbox 360 has no problem whatsoever decoding 1080p video, it is no longer being rendered in native resolution. To illustrate the issues, here we see the same full HD video being run on an older NXE dash at 1080p, and the new Metro offering at both 720p and 1080p. As you can see when clicking on the thumbnails, just about all the detail is being resolved on the older front end, but the Metro dash's 720p and 1080p images are effectively identical in terms of core resolution.
Compounded with earlier accurate reports that the new Xbox dashboard is displaying colors incorrectly for video, this is a bad problem users recognized in the beta that Microsoft has refused to acknowledge so far.
Other services appear to be artificially limited in the new video marketplace apps. For example, streaming service Vudu offers 1080p24 movies via its "HDX" service but in its FAQ it mentions that "Xbox 360 is limited to HD only (720p)."
Once again, the 720p limitation was reported during the dashboard preview programme and in common with the video levels issue we have reports that Microsoft deleted threads that referenced it.
So Microsoft is limiting third parties to 720p video now.
The obvious conclusion is that the SDK Microsoft is believed to have supplied to third-party video partners is limited to 720p only, leaving Microsoft's host service with a clear quality advantage. The message we draw from this is that the platform holder wants to expand the take-up of the Xbox 360 as a media-streaming device, but very much on its own terms with its own content getting the best quality, and the user's "homebrew" media not being given much importance at all.
Incorrect video levels are obviously a bug, but blatantly downgrading resolution looks very much like part of a strategy. As it is, the new dashboard's preview programme ensured that the issues were brought to Microsoft's attention. Now we wait to see whether anything will actually be fixed.
We'll se. In the meantime, Microsoft has hurt the Xbox's video playback such that I'd actually use my PS3 to watch video instead--the first time this has been true. Making your product a worse one than it was already is never the right move. It seems Microsoft has been taking lessens from Sony's repeated downgrading of users' PS3s.