Why is AVI support going to go, the movies are only 50mb bigger total than the Ogg's (290 vs 225 for FS2 and 143 vs 153 for FS1)? Where can I get the MVE's?
Well, technically we have never had AVI support. We had DirectShow support, but that's it. By having DirectShow support we don't need to support any particular movie format, since it can allow access to most AVI formats, WMV, MPG, and others. But DirectShow was never really meant to be used the way we were using it. It plays in a separate window from the game, has it's own message and input handling, and is totally at the mercy of the codecs installed on each users system. We just can't continue to support something that has the ability to work completely differently for every single person that uses the game.
MVE support didn't originally exist,

ripped it out of the game's source code for licensing reasons. The format was later reverse engineered and included in other games. Eventually it was just decided to finally support it in FSO, even though the licensing issues still exist. But since MVE support wasn't always available, and people needed support for some movie format, DirectShow support was added.
But other than the endless technical issues with using DirectShow, it only worked under Windows. We support OS X and Linux though, which means anyone using AVI movies in their mods will only for Windows users and not the rather large OS X and Linux user base.
So we searched for a new codec to replace DirectShow, but with a specific set of goals:
- it had to be a modern and feature rich codec
- it had to be cross-platform so that it would work on all three platforms we support
- it had to be directly embedded in the game binary, not some external lib or program interface
- it couldn't have licensing issues which precluded our using it
Theora fit those conditions since it's under an open source license that allows us to integrate it with the engine, is cross-platform, and presents the movie data in a way that we can easily plug it into the existing audio and graphic support of the game.
So, that's why Theora, and why we are dumping DirectShow (AVI) support.
As for MVEs, most people already have them, and there is no reason that they should have to install something else unless they want to. So the MVEs aren't required. The only people who might want them are people with slower computers. The MVE player is a lot less resource intensive than the Theora player will ever be, so MVEs can play easier on slow systems.
Regarding file size of AVI vs. OGG, the OGGs were converted with quality in mind. They are at least 15% larger than they would be with default settings. But higher quality settings were used for both video and audio in order to enhance the movies. The quality settings varied based on each individual movie, with some getting very high quality settings, and others getting slightly more than default quality settings. The resulting file size was barely even a secondary concern.
Makes sense, except for the codec part, since you have to install Ogg codecs and Theora codecs to play the Ogg/Theora movies 
No, the codecs are built into the game. Just because Microsoft doesn't include Ogg Theora support by default so that you can play the movies outside of the game has absolutely no bearing on us what-so-ever. DivX and XviD support aren't included by default either, and you don't seem to be complaining about that. For AVI support you had to manually install one of those in the first place just to be able to play movies inside the game, much less outside.

Is there any way to fix my initial problem though - the fact that the Ogg/Theora movies are playing at half of the size that they should be, and aren't showing anything but a pixelly mess of a picture?
D3D is unsupported, don't use it. Use OpenGL and you won't get the pixelation. I'm still not clear whether that fixes your half-size problem, but you haven't really explained it that well either, so I'm not even sure what the issue actually is. Make sure that you don't have -noscalevid selected in the Launcher.