If memory serves me correctly, it enables you to choose what decompressor is used for video encodeded with certain codecs. This forces divx to be decompressed using libavcodec for example. It's useful if you're having performance issues as apparently some decompressors are less resource hungry than others.
Strictly speaking, you don't need to use it if you're happy with your existing playback performance. IMHO, it's more for those that want to tweak away...
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