Part of the DLNA specification is negotiation of capabilities, so both ends of the connection will say which formats they can do. If the player can handle the file as it is, the server will stream it over the network; otherwise, the server can transcode the stream to something else. Transcoding means that the stream will need more bandwidth, and will put more load on the server, but is generally painless: my PS3, which barely followed the specification, was the only thing I've used that was finicky about formats.
AVI and MKV are just container formats: the important part is how the stream is encoded; widespread encodings like those used for DVDs, Blu-Ray, and YouTube, tend to be hardware-accelerated in consumer hardware, so those are generally easiest to get working without transcoding.
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