It's not correct that WMV is the most compatible; Flash is definitely the answer nowadays. The WM plug-in is not distributed by default with Firefox for example, so there goes ~30% of your traffic! (I also find that the Firefox plug-in doesn't behave as well as it should it some respects). And what about non-Windows OS'es? The presence of WM certainly cannot be presumed.
Flash on the other hand has much better adoption which continues to be pushed as a result of sites like YouTube, and the vast majority of Flash Players out there are already H.264 compatible, which is a superior format to even VC-1 Windows Media ver 9.
Flash also gives you better control over the player interface which might be an issue with regard to graphic design.
On our site we have a 9 minute demonstration / promotional video. For this, we have
- A 33MB 448x336px F4V (MPEG-4 encoded with X264) [Flash]
- A 20MB 320x240px WMV (VC-1) [Windows Media]
- A 20MB 320x240px MOV (H.264) [QuickTime]
So the Flash averages out at ~ 60KB/s (500Kb/s) which I think is acceptable if broadband is assumed. Quality is the priority... I'm not interested in providing heavily compressed or reduced framerate video.
As far as usage stats are concerned, the Flash gets a bit over 2/3, with most of the remainder going to WM (sheeple seeing the Windows logo or word and just blindly clicking on it).
(The site audience is completely IT-unrelated, and non-technical).
In another year or so I believe the inline H.264 via Flash will be enough on its own and the multiple formats won't be necessary.
I recommend FlowPlayer for a very well written and customizable [free or licensed] SWF player.
It has good support for webmastery things like Google Analytics event recording (play/pause/finish etc), and also has good functionality for smooth inline upgrading of the Flash player if the user's version is too old.
Lastly, IMO you should definitely provide a simple link to a downloadable file, for those that don't want to watch inline embedded in a browser, or who want to leave it downloading on a slow connection. We provide this in the format of a higher resolution MPEG-4 file, with X264 video and AAC audio. I figure that folk bothering to download the file can figure out how to upgrade their systems to handle that, so it becomes the "power user" option.
Last comment on the actual process of encoding the video: a good place to learn about this is Doom9. If you don't have the time or don't care, I would suggest that you get a good subcontractor to do it for you, as it is not that easy to do it "properly". Make sure you find someone with a good resume of technical quality - there are lots of wannabes out there who think that Windows Media Encoder, or saving out from QuickTime Pro, or the encoder that comes with Flash is how you generate good web video!