1080p24 being what it is, @ 1920?1080 w 24 frames per sec, is not an especially stressful task for a N7 but is obviously overkill for it's 1280?800 display resolution. The real overkill comes with the 7.1 or 5.1 sound tracks being output thru the N7 tiny crap stereo speakers or headphones (better). So conversion is one choice to deal with the square peg into the round hole. Conversion is always a tradeoff between quality and file size however, there is no real reason to downsize all of your pre-existing media other than to save storage space on the N7. If you use virtually unlimited external or streamed media, there is no reason at all to pre-convert media you already have. Using 32 GB microusbSD flash readers @ $20 each obviously negates any pressing need to conserve space in any serious way.
I regularly play HD 5.1 sound .avi, .mp4. .mkv and .m4v files already prepared for my home theater system to my N7 without playback issues with MXplayer. So there it is. One can always use TVersity, Plex, or other media servers that can convert on the fly if you like by simply changing the software settings should you encounter a playback issue with a particular file.
VLC player for android is still in beta mode as far as I know, so perhaps it would be best to use something else until the bugs are worked out.