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Note H.264 support in Firefox is only available on Windows 7, and soon Vista. So if you want to support Windows XP, you will still need WebM, Ogg, or Flash fallback.

For WinXP do you need to transcode, or can you just serve a lightweight player UI that use H.264 support built into the Flash plugin?

Use something like mediaelement.js which uses standard formats first and falls back to Flash if not - XP is a legacy platform so there's no point in investing time on it.

It depends. You'll get better integration into the browser if you transcode. But if you're doing the "YouTube testcase", just using a Flash player fallback (without transcoding) would probably suit your needs adequately.

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