Well DV-AVI (video that comes from a miniDVD/digital 8 video camera) video takes up about 13 Gigabytes of space per hour, which is prohibitative for most people to download and store. That's why we convert to MPEG2 and store the resulting footage onto a DVD.
If you encode your footage correctly, use a decent encoder (CCE, ProCoder, TMPGEnc) and encode the footage at a high enough bitrate, it will be difficult to tell the difference between the original DV-AVI and the resulting MPG2 file.
You can fit 1 hour of video onto a DVD5 (single layer DVD) at the maximum bitrate. Obviously you can put more video onto the disc but it will result in a reduction of quality.

The MPG2 codec is quite old (nearly 10 years old) and isn't very efficient. There are better codecs now available such as XviD and H.264 that outperform MPEG2 at the same bitrate. The reason why these codecs aren't as popular as MPEG2 is because the hardware to play these file formats isn't as readily available. Although with media centres, modded xboxes and computers networked to your television becoming the norm, people won't be forced to always use MPEG2 to distribute their videos.