I use my Xbox for this purpose, one of those would only cost you a little bit more ($199.99+the cost of an HDMI cable as opposed to $129.99, and it would give you a lot more options (play files from discs as well as the hard drive, stream content from your PC, play games, stream netflix if you have a netflix account. For even more options, the $299.99 PS3 gives you everything the Xbox offers, minus the netflix streaming, but plus a whole lot more including blu-ray.

My Xbox has always worked great with video playback, so far it has played all I have thrown at it, save for a few broken avi files (a quick run through divfix solved the problem everytime). A quick google search, however, seems to indicate that the 360 has trouble with .mkv files, which need to be converted to an mp4 container (can be done losslessly) in order to function.