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You can try this:
Try the codec tweak tool to make sure no video-related system files are overwritten:
Download the Codec Tweak Tool: https://www.codecguide.com/download_other.htm
Apply these settings: http://i.imgur.com/KcQcmTX.png
Restart the PC and try playing the video.
If that does not work, try LAV as described here:
https://steamcommunity.com/app/431960/discussions/2/1484358860951576217/
If that does not work, try using the System File Checker tool to repair your Windows:
https://support.microsoft.com/en-us/help/929833/use-the-system-file-checker-tool-to-repair-missing-or-corrupted-system
Other than that, I am really not sure at this point. Wallpaper Engine basically just uses Windows Media Player to play video wallpapers and that should "just work". There is definitely something funky about your setup but it could be a wide range of things.