PS3 supports a wide variety of video formats. But there are multiple caveats regarding the playback all relating to the licensing of propriety codecs. PS3 plays avi, mp4 etc. but only some codecs like xvid are playable. mkv files will not play. If it a direct presonal copy from a DVD VOB file it can play. Also, it refuses to play some formats from external media. In that case copying to the PS3 local disk might work.
PS3 is not supposed to play single video files due to DRM(Digital Rights Management). However, if some personal video like a party video is concerned and someone want to play in on a bigger TV screen rather than a PC then it is understandable. If it is laptop it might have a HDMI output so no need to go through alll the hassle. but if there are no laptops then it makes sense to use the PS3 to view videos.
To view videos in PS3 it is best to encode all videos with the xvid codec. This is easily acheived with mencoder.
mencoder -idx inputfile.dat -ovc xvid -oac mp3lame -lameopts abr:br=92 -xvidencopts bitrate=687:threads=4 -o outputfile.avi
-idx option recreates the index in case the file is damaged and the player is not seeking the file.
-ovc : output video codec = xvid
-xvidencopts : xvid options. set the bitrate. anything above 512 works fine. I have set bitrate=687. threads=4 would ask the encoder to use parallel threads (best more multi-core CPUs).
-oac : output audiocodec. lame encoder. options audio bit rate : abr : bitrate : br=92