The "Movies" folder is used for storage of iMovie, iDVD, and other related projects, as well as the primary folder accessed by Front Row.
I do not know a way to change the folder in front row, but you don't have to use it. You can click on the folder in your Finder sidebar, and move it out of there so it poofs away (like icons in the dock do when removed).
You can make a new folder and drag it into the sidebar. Do not delete the folder when you notice there are two copies (one in the place you created it, and one in the finder sidebar). The sidebar just holds shortcuts pointing to the real folders, just like the dock holds shortcuts to the actual apps.
As for your organization of Media, it depends on what you want to do really. If you wish to import the movies into iTunes, go on and do that. If iTunes is set to "copy to library when adding", it will make copies of the movies and store them in the same folder as the music is stored in.
If you wish to just put them some place else, the movies folder is fine, and they will show up in front row. If you want to use another folder, or an External HDD to store them -- create an Alias (shortcut) of the folder containing the movies, and place that alias in the default "movies" folder. This will point Front Row to the External HDD or wherever the real folder is.