Most blueray DVD players currently in the shops in the UK will play video files on CDs or DVDs, to varying degrees. Plus sound files, mp3 etc.
It's like getting the T2 to play video files - it plays a few formats.
So yeah I agree with you - it will always be easy to find some combination that doesn't work. I recall talking to Humax's tech support about supporting MTS files from my Canon G10 movie camera. MTS is a really common format for prosumer flash memory cameras. The guy was quite helpful but he said they make a decision to support a few formats and that's it. With it being a unix box and with so much being open source (when you buy a Chinese wifi router you think some bloke in China wrote the code?) they could have supported "everything" but presumably there is a policy decision there...
I have just done the mpeg conversion route and - superficially at least - the result looks the same as before. The end DVD is almost the same size - over 4GB. I actually cut out the adverts this time, in Vegas, and got it down to 3.3GB. I don't know why a 1GB mpeg2 grows to about 4GB when making a video (not blueray) DVD but I am sure there is a very simple answer. The mpeg was 704x576x25fps and the video DVD is 720x576x50i.
The other thing I noticed, and this is presumably a Humax improvement, is that the box plays the files on the network drive much better. The previous firmware would only display some directories. Now I can see them all.