As I recently found out, .avi is just a container, like .txt, but the content it contains can be in many forms...So, use a suitable codec (encode the video) and it'll be smaller.

It is possible to find snippets on the web and use them almost directly in a dll to encode or decode video files and play them (ffmpeg is a library...) (I suppose the play speed is up to you in this implementation...), but you'll need to somehow get the decoded picture in the engine, maybe in a bitmap and use it on a panel?

I hope this helps a little...