HD appears pixelated when the system is not strong enough to play it. H.264 support in VLC is still not good enough, and hence I think you should try your luck with the latest nightlie build. If that too doesn't work out, moving to another software is the only optopn.
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VLC and Other alternatives to Popular Media Players
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On Linux, blindly use VLC, SMPlayer, Kaffeine, GXine, Totem and MPlayer
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