I'm pretty sure the update involved a change that which stops users from playing illegally downloaded movies. Cuz that's just it, they're illegal, and the PS3 doesn't want you to be playing illegal crap on it.
I am looking at my ps3 now. Version 3.50 w/ Netflix installed and can play downloaded movies just fine. I've tried 6 movies newest being Daybreakers / Sherlock holmes. Might I have you try copying the movies to your ps3 instead of playing them off the USB ?