I am wondering if the video graphics quality of the streaming computer affects the quality or playback of the extender such as an Xbox360 i.e. would my extender experience be better with a high quality video card versus the integrated Intel graphics (which does have smooth HD playback in both MKV's and in media center HDTV channels) which the computer is currently using.
This issue is slightly interesting. Media Center Extender functionality works over RDP: When you navigate your media library through the WMC interface on the xbox, you're actually working through an RDP session that the xbox has opened to your computer, which is running WMC. When you start media playing, the computer sends the media to the xbox over a different channel, using a standard media streaming protocol.
So, the interface is rendered on your computer but the media itself (i.e. the video) is not. Depending on your OS, media extender, and the formatting of the video, it might be transcoded for streaming. Let's look at these two issues:
WMC adjusts quality automatically to suit your network, so the factor limiting the quality of streamed media is going to be the quality of the home network. Is the extender connected by WiFi? cable it if at all possible, WiFi adds a scourge of potential problems to a media streaming setup.
Hmmm, I took a brief look and it seems like it can go both ways.
That would suggest that the extender uses native decoding when possible, but otherwise, the host must transcode the media. The interface, however, is rendered entirely by the host.