Windows 7 has native support for AVCHD
which is nothing but H.264/AC3 inside a m2ts container. This means that Windows Media Center can now play these files natively.
Most MKV media that I have seen (personally I have just two MKV files) is H.264 with AC3 audio. So all I needed to do was change the container from mkv to m2ts. Since this method does not need any lossy transcoding, it is far easier and much faster. As long as your source is good, the result is pretty much guaranteed.
1. A decent spec PC with Windows 7
2. SmartLabs tsMuxer
(freeware, no install required)
3. Xbox 360
with Media Center extender enabled.
4. MKV media with AVC/H.264 video and AC3 audio
1. Start tsMuxer and add your MKV clip in the input section
2. In the Tracks section check if you see expected tracks. I included the subtitle track but apparently WMC and WMP don't use it.
3. Did not do anything in the General track options setting
4. In the Output section select M2TS muxing and select desired location.
5. Now hit Start muxing button at the bottom.
6. Depending on your PC, it will take 5-10mins to perform a pass through conversion of the clip.
7. If all goes well, Windows Explorer will display a thumbnail for this. Try playing it in WMP and check if it plays without problems.
8. Now move the m2ts file to your Video library.
8. Media Center has a special library called "Movie Library" that you can setup from its settings. e.g. e:\Movies. Move the m2ts file to this location.
9. Now give Windows Search enough time to index the new file. For me it was roughly 5mins.
10. Launch WMC from Xbox 360
11. Navigate to either Pictures + Videos>video library
or Movies>movie library
and play the file.
For me this worked without any problems at the very first attempt. I haven't experimented much with tsMuxer besides whatever I wrote above. This obviously will not work through the dashboard since Xbox 360 doesn't recognize the format (it did not show up in list for me). I am sure they will add the support soon because all consumer HD camcorders use m2ts(or mts) files. PS3 probably supports m2ts format already because of Sony's handycam connection.
Hope this helps people who have Windows 7 installed. I am using build 7057. Although Media Center can be shaky at times so YMMV.