Windows Phone 8.1 RT.
It seems the MediaElement does not play files from outside Video Library. The video files that are located directly under c:\data\users\public\videos and visible in Videos app (or may be local app storage, I haven't tried this one).
It consistently thew MF_MEDIA_ENGINE_ERR_SRC_NOT_SUPPORTED : HRESULT - 0x80004003" error while playing videos outside of the Video Library. Even for the ones in the Camera Roll, leave aside the ones in the additional albums. If I play Camera Roll videos from Photos App the work fine. Also, the ones in other folders work fine if playing directly using Phone's native apps.
Is this a bug or as usual intended "feature" to limit developers from creating awesome apps :P