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1. How do I get MPEG-4 in 720p or greater that I can play in QuickTime/ IE, etc out of PD7?
The fact that Quicktime can't play or recognize M2TS files is not a PD7 limitation.
2. Do I get better or worse quality by going to AVI or MPEG-2? It seems I certainly get a larger file.
Its not that simple. The same 'Quality' file of MPeg2 will be larger than Mpeg4. MPeg4 is simply more efficient and yields better compression. In almost any case, the way you improve 'Quality' is to increase the bitrate that it is rendered at.
3. PD7 outputs the m2ts file. Now what? They allow us to create it for some reason. What am I supposed to do with it? Store a collection of them for later reimporting back into PD7 to make a disc or another video? I don't get it and obviously documentation is NOT a Cyberlink strong point.
Both Youtube and Vimeo accept M2TS files directly but it take a couple extra steps during the uploader process. When you upload to youtube, it gets an error at the end an says the upload failed (but it doesn't fail) and your video shows up nicely.
MPeg4 and M2TS are bleeding edge (as you are finding out) in the video world and broader support is coming. It does yield the smallest, most efficient files if that is important to you.
In the meantime, MPeg2 is compatible with just about every software out there, and the way you keep high quality is to use high bitrates. So, edit your project, use Mpeg2 and very high bitrate if you are going to do further editing in other software. Apple and Sony can easily read Mpeg2.
WMV is a high quality format, but apple won't read it directly. It sucks that Microsoft and Apple have chosen their proprietary formats and we, the users, suffer having to constantly convert stuff.
If you are just going to upload to Youtube, the M2TS file is good because it saves on bandwidth and uploads quicker.
You'll have to experiment and find out what encoding strategies work best for you workflow. A lot depends on where you are trying to get the final video to end up, storage, Youtube, DVD, etc.
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Several scratch drives for video, TMP, pagefile.