there are 2 ways to do it, most programs go for the approach of converting all of the files before playing, that means having a second copy of all of your files, and also adds the extra step of having to convert before you want to watch - that's why i suggested tversity instead as it converts it while you are playing it, so no need to convert in advance or have multiple copies of everything
but if you don't mind convering before you can watch and having multiple copies etc then either method works just as well