All of the video apps were written to use Microsoft's Silverlight Smooth Streaming with their PlayReady DRM, which is why they all have to be updated. All of the apps were created using that initial SDK, so they all have to be patched to put in this new fix.
However, this update doesn't put things right. Video playback levels on the dashboard and video player are now correct. However, the picture viewer now clips black at digital 16 now as well, whereas it should be doing a conversion on picture files since they are 0-255 PC standard. This conversion WAS correctly done on every pre-Metro dashboard. To see the difference, load up Windows Media Center and it correctly displays images in 0-255 with full resolution. WMC also displays 1080p video in full resolution... but still with the incorrect 0-255 video levels. So basically, there is still no way to properly display 1080p video on the 360.
It's ridiculous that Microsoft, of all the companies, doesn't understand the simple math that goes on with this conversion.
And michaeltscott, I reported both the black/white level problem and 1080p downscaling on the first day of the preview program, and hundreds of people confirmed it. Microsoft deleted the threads or marked them as fixed, which is why Major Nelson got hammered with links to the Digital Foundry article that revealed these bugs to the world. That's the only reason you're even hearing about this being fixed... because it was one of the top ten reported bugs in the preview program and they ignored it, but none of us would let it go.
"Never believe any quote you read on the internet." - Abraham Lincoln