In the latest firmware 2.0 update, Xvid and Divx files can now be detected as video options on the PS3.
Quote from PSU:
Now the files still won't work on the PlayStation 3, but this new find may lead us to believe Sony is planning to support both Xvid and Divx files in the future. My guess is that Sony may be doing this so that when Home is launched, users can convert their files to Divx (for smaller file sizes) and use them to display in their Home studios.
Divx is well known in the internet world for its ability to compress lengthy video to smaller storage sizes, without losing visual quality. Xvid (Divx spelled backwards) is a direct competitor to Divx, providing similar compression features and supporting MPEG 4 and H.263 video formats.
If Sony plans to fully support these video formats, this will help when importing videos into your PlayStation Home as they will upload faster without losing quality.