You have to convert the files so that they can play in the Flash player (FLV stands for Flash Video). The same thing happens when you visit sites like YouTube (in fact, more happens as the file gets converted into multiple formats, not just Flash Video). The difference, however, between YouTube and your site is that while you may have a powerful server (without the S) dedicated for your site, people like YouTube have servers (with an S) that are dedicated to just converting video. Further, people like YouTube use different software to convert the video (whereas we are limited to open-source free software such as mplayer/mencoder and ffmpeg, although YouTube probably used them as well at some point).

AVI files are probably going to be the biggest problem to encode. Unlike WMV (which are Windows Media Videos) and MOV (which are Quicktime Movies) which are specific formats, AVI's are not anything in particular (AVI stands for Audio Video Interleaved). Rather, AVI is what is known as a container format. This means that any audio or video format can be called an AVI (and be given an extension of .avi). While a large portion of the AVI files that you find on the Internet today are either Xvid or DivX files, a lot of them are composed of older Xvid and DivX (which was more proprietary and, in some cases, ripoffs of other formats) while others are composed of newer Xvid and DivX, along with other combinations. As these codecs today are more open, they tend to evolve faster than your standard formats. Every few months, DivX and Xvid compression get better or more sophisticated and, because they are in themselves their own standard (even though technically both formats fall within the MPEG-4 umbrella), it becomes harder and harder to keep up with them, which brings us to software such as vShare. vShare relies upon mencoder, mplayer, and ffmpeg to be able to read, break apart, convert, and assemble movies that are uploaded into Flash Video. The problem that we all run into is that we only install the software once (when we first install vShare) and never touch them again. In some cases, many of us install outdated ones from the going as some of us run into either problems installing the newer ones or run into problems with vShare being compatible with the newer ones. Because we only do this once, over time, you are going to notice that certain formats become harder (or take longer) to convert or may not even convert at all. This will be especially true for files like AVI's and MKV's, which are not formats but merely containers that could potentially contain any format that the encoder decides to put into them.