WMC is a playback interface of WMP, it is format agnostic (to an extent). What formats you use are going to be dependant on what you want for size vs quality vs ripping software used vs features (not all formats allow for subtitles, or 5.1 audio, etc). Also, when learning about things understand that there is a difference between 'containers' like WMV, AVI, MPG, etc. and 'compressions' like h264, lagarith, cinepack, etc. The container generally dictates the features available, as well as the compressors allowed to be used within it, while the compression is simply a trade-off of file-size, quality, and upscaleability.
For example, h264 is a wonderful compression (one I use a lot and will likely use when I get my home server up and running), but it does not upscale well so you will want to rip your content to your preferred resolution. mpeg on the other hand is not the best quality/GB, but I am constantly amazed at how well it can upscale, which makes it a viable option to save everything at SD or 720p at high quality and still upscale to 1080p without too many visual artifacts (though textures will be gone). You will have to play with whatever ripper you plan on using to find what works best for your computer and TV before making a decision.