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They look good but 4:3 aspect ratio makes the usable area of a widescreen movie pretty wasteful.
 
I'd like to know, too. Also, how are 720p/1080p YouTube videos are on the new iPad's retina? Too much space wasted?
 
480p and below look blurry
Youtube is a random mix of 360p, 480p, or 720p when you enable "HQ" mode and there is no 1080p option, so it varies depending on the video
720p looks sharp
1080p looks impossibly sharp and detailed

That's both in landscape and portrait.
It's like watching an animated print on a piece of paper rather than watching a movie on an HDTV.

Needless to say the black space enclosing the top and bottom are huge, but not obtrusively so. The good thing is that if you accidentally tap the screen and activate the controls, they won't obscure the movie.
 
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