I'm using .avi at the moment.
Sorted out the choppy video playback problem. Live wallpaper seems to like an mp4 encoded file best. So i converted some .mov files to mp4 set at 800x480 resolution at 30 fps with bitrate set to 1200 kbps i used 'super' video converter and the results are good. Try these samples i converted from the link below. SUNRISE CLOUDS WAVES MP4