Originally Posted by Stephen Warren
We're putting some thought into removing this restriction, so that overlay can be used when the X composite extension is enabled, but the window is not currently redirected (i.e. compiz/desktop effects are not enabled). That said, I'm not sure exactly how useful that'll be, since I think full compiz is also the default in many cases, which would still prevent overlay use.
Well, not exactly. For example with kde4.4 (didn't test with older versions), if I disable the X composite extension I sometimes get some artefacts on the panel due to plasma animations when closing/opening apps; I've not found a way to disable those animations.
Also it seems I only get "tearing" with .avi files, not with HD/h264 or .vob files.