This is great. A no sound HD version would be better for a wallpaper.
I did get VLC to work. YMMV
Tools -> Preferences -> Video -> Output Modules -> DirectX -> Enabled Wallpaper Mode
Tools -> Preferences -> Video -> Output Modules -> "DirectX" Not DirectX3D
Open the command line by typing 'cmd' into the windows run box then right click in the window, click paste. Hit enter and wait a moment.
Code:
start /MIN c:/progra~1/videolanvlc/vlc.exe --intf wx --wx-embed --directx-wallpaper %1
View -> Playlist -> Click Loop Icon
Lastly, double click the tray icon to hide the main window.
WooT!@
Edit: Darn, I couldn't get it working a second time.