SFD

Sofdec, abbreviated as SFD, is a video container developed by CRI Middleware and used in Bayonetta. It uses MPEG video and ADX audio. In Bayonetta they're named SFD, but they're actually USM. Most video tracks are running at 30 fps. The audio track is always 48000 Hz stereo ADX. They can be played outside of the game on MPV (found here), audio may glitch when skipping the video.

DCMovieCreator
DCMovieCreator is official Dreamcast development software for Windows that provides full functionality for converting an AVI video file to an SFD with a straightforward, user-friendly GUI. There have been mixed reports of success with different AVI codecs, sometimes resulting in video playback ending earlier than normal ingame. The best known codec is the | TechSmith Screen Codec.

TMPGEnc 4.0 XPress
Some users have reported that TMPGEnc 4.0 XPress (found | here) provides better video quality (using VBR encoding). Rename the exported video to .m1v and use it as input for DCMovieCreator.