I understand that most of the MKV movies have a high profile video and it is beyond the capabilities of the ATV hardware to play it in real time.

If that is the case, I wonder what format Apple Store uses when you rent/buy full HD movies? Because all their movies are playing just fine... Isn't that a high profile?

Further and most important: how we could convert the tons of MKV movies found on the net in something that will work on ATV? Does anyone have a how-to in details? Any suggestions please?

Try Handbrake or ffmpegx. Both apps are very easy to use and have some presets for AppleTV, iPod, etc ....

Apple uses H.264 in an MP4 container if I'm mistaken here.

H.264 in MP4 or in MKV makes no difference whatsoever. What matters is the complexity of decoding the H.264 bitstream. High profile 720p (or higher) is beyond the processing capability of the ATV. Additionally if you are using Apple's H.264 codec to decode, it'll crash.

Apple encodes their 720p content in Main Profile. This is significantly easier to decode.

Thanks guys.
However, let's keep in mind that when you purchase a full HD movie from Apple store, it will play nice without any problem. The size of their movie to be downloaded is about the same as we download a high profile MKV and this is what I don't understand. If the Main Profile could play these movies nicely, how we could convert our MKV movies in this type of media (MP4) and play all our movies.

I already have over one hundred movies and most of them are in MKV (micro HD-720p) but could not play them. Most of the movie sites are publishing in MKV and they have tons and tons of movies. I am sure that someone figured out how to convert them conveniently from MKV to MP4 profile, if this is the format we need to play on ATV. But we must find that person and ask to share the knowledge with us...

I've used MKVTools to quickly make mkv's into mp4's with "passthrough" for the video. Basically, (from what I understand) it changes the container without having to process the video.

It works with my Xbox 360 and PS3 but I'm having trouble with playing them on the Apple TV. iTunes will accept them but I get stuttering even when playing locally on the Apple TV.

Another alternative would be to use Quicktime Pro to export the mkv with the passthrough option selected. You would need to install Perian first in order for Quicktime to open the file.

The h264 that im assuming is inside the file is probably high profile, no matter what you do short of encoding the appletv's processor is too weak to handle high profile h264 so you will always get stuttering.

Just FYI, with some experimenting in Perian's source, I've been able to get High Profile 720p H.264 to play at about 15-24 fps (original content was 24fps). This was done by skipping part of the decode process, which will slightly degrade the image. The end result is it is watchable, but I would judge a lower resolution file at full quality and framerate a more enjoyable experience. Sad thing is, just a slightly better CPU would make this file playable.

Actually, far far better than this is not export, but rather select Save. If you select to save as a reference movie, then you will get a far smaller .mov file. Put this along side the .mkv file, and the ATV will use the .mov file as the container, pulling the actual stream data from the mkv file. This is particularly useful if the mkv file is initially on the ATV in the first place.

well i knew if ANYONE could get it to play well on the AppleTV's pathetically and inexcusably crappy processor it would be you. good work and kudos as always

To make a long history short, AppleTV will play 720p movies up to 3000kbs/s of bitrate on XBMC, nitoTV max is about 2000kb/s.
The problem is not the CPU it is lack of GPU power.

The GPU cannot do full acceleration, only partial. This means that the CPU still has a considerable amount of work that it must do, as it is only saved a few steps, such as the entropy coding. In order to actually play files like this very well, it either needs a GPU that can do full acceleration, or a faster CPU. BTW, Blue-ray (1080p High Profile, 40Mbps) level streams are quite hard to decode unless done entirely in the GPU, even with modern CPUs.

Lastly, the streams I tested in my experiments are over 3200kbps (I'm only counting the video bitrate here).