Actually, playing HD video is a question of hardware, not of file types. Most of the videos I'm playing on the default media player are encoded in MKV containers. But the N900's hardware is just a little underpowered for playing HD resolution data (not to mention that it has a screen that's much smaller than 720p, so you'll never see any benefit in quality when playing video of that size anyway).

There are some folks who have (by hook, crook, and overclocking) managed to coax 720p support on the N900; see this thread if you want to try it out yourself.

I personally optimize my videos for the screen size of the N900 before loading them onto the phone, so I really have no problem running anything I want to watch.