Set your display equal or less than 1024 x 768. If your video is less than 300px, viewing with full screen which cause it to show the "blocks".

Since the source is small, play in full screen will make it a bad thing. Not sure if resize that video will make it better.
As rule or thumb, resizing video (or even a picture) will make the final output worse (unless you're using hi-tech software like in the movie ) but downsizing it should give no problem.