The Windows WMV file format can support resolutions up to HDTV and film quality. Its not ture to say it is anything of a lesser quality than any other format. In fact it is as good or better. Many videos made with it however and distributed as video examples of games are saved with the highest form of compression which it also does very well.
You can compress a 300mb file say to 9mb or thereabouts and complain of course when the quality is poor if you wish.
The choice is yours as to what compression you choose.
Dont blame the file format.
As to what formats V1 will support - it should support any file format that the Windows Media player supports. If it does not then it should, plain and simple, as thats what around 80% of the worlds computers support. Supporting anything else is just making hard work of it for end users. i.e. game players (not game makers) - for absolutely no reason.