Where my room is in the house, I don't have an internet connection. I took my 360 down to the router, plugged it in and did the optional media update. I then put in my thumb drive and tested to made sure it worked and the movie played.
I then unplugged everything and took it back up stairs to my room where I don't have access to internet and connected everything and tried to play that same movie .... and it doesn't work. It gives me the same prompt that I a media update is required. Weird.
I take it back downstairs, and as long as I'm logged into an account with an internet connection, the media source plays exactly as it should. I bring it back upstairs .. same issue saying I need to sign into XBOX Live and do the update .. which I've already done.