Step One Download the required components from here.
Step Two Extract the zip you just downloaded to create a folder on your desktop called Components.
Step Three Launch Terminal by selecting it from your Applications:Utilities folder.
Step Four Now we will copy the components to the AppleTV. Enter the following four commands into the Terminal window. You may be asked for a password. If you are please enter frontrow as your password. Also please note you can change AppleTV.local to the IP Address of your AppleTV if you like.
Step Five Now we need to log into the AppleTV and put the files into the right location.
Enter the following command into the Terminal window. NOTE***: You can replace AppleTV.local with the IP Address of your AppleTV if you like.
ssh -1 frontrow@AppleTV.local (If prompted for a password please enter frontrow).
Step Six Now we will move the files to their correct location. Please enter the following commands into the Terminal window. NOTE***: If you are asked for a password please use frontrow as your password.
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The following will introduce a step by step guide on how to convert 1080p video in MKV, AVI, Xvid, Divx, MP4, FLV, WMV, WTV, WebM, AVCHD, MXF, MVI, VOB, F4V, BIK, RMVB and MPEG to Apple TV supported format at http://www.bigasoft.com/articles/convert-1080p-video-to-play-on-apple-tv.html
Then it is just easy to play MKV, AVI, WTV, WMV, FLV, WebM, AVCHD, MPG, DivX, MXF, and VOB etc on Apple TV/Apple TV 2/Apple TV 3
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The point of this record is that reovall there is not a huge difference. If you watch in HD you will see DivX doesn't have quite as excellent quality. XviD has better quality so I urge that.