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For a sandbox game this is very useful, where you can spawn video players in-game. For social games (like VRChat) this is also great since synced video playback is a very popular feature for people to watch content together in VR.

Unity includes its own video player implementation ( https://docs.unity3d.com/Manual/Video.html ), so presumably you'd mainly want to use VLC for wider range of supported codecs?

Basically. Unity video player is fine if you control the content. The other very reasonable option is to funnel shared content through a synced web browser interface. I've developed a few collaborative XR applications, and have used a blend of things to support sharing.

It’s not hard to use libavcodec to transcode, though.

RTSP support, twitch-style in-game visio, any kind of non-game Unity apps (there are many), 360 video playback, mediaplayer in VR headset, simulators of all kinds, etc..

Unity video player leaves a lot to be desired.

The standout option for a more elaborate video handling was typically AVPro. It's a really good option, with that said with vlc stepping up hopefully it's no longer strictly necessary.