I don't know many open codec handheld devices. Everything I've owned has required some kind of fairly prescriptive transcoding to play video if only because of the multitude of resolutions on the marketplace. If a user can drag a video file into iTunes (for instance) and have it encode on the fly invisibly to one standard format, I would hazard a guess that this would be exactly what the majority of users, myself included, would be content with. I foresee alternative video players on the same device allowing the freedom for open codecs like divx but from Apple's pov it's far more intuitive to make their inbuilt video player single standard.
I own the 640x480 Creative Zen Vision 64GB - it can play all DivX, xVid, MP4, MP2, etc content without transcoding. Max res of 640x480 - however it is a 3-4 yr old device. My current Cowon A3 (2 yr old device) with
16.7 mil colour (not TN based but PVA or IPS based LCD) at 800 x 480 can play H.264 (higher profiles than iPod), DivX, xViD, MP4, MP2, MJPEG, etc at up to 720p (1280x720). It definately outputs 720p via component too. It has 80GB storage. Plays MKV, AVI, OGG, MP4 etc containers. Subtitle support.
The newer Archos players play even more formats.
So no, I didn't have to transcode stuff.
Apple just wants to push iTunes, that's all. You can get DivX, XVid, x264, etc encoders for the Mac, you can produce content, just not use Apple Apps to do it.