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wmv and wma stink in my opinion. A well-compressed avi isn't large, you can easily put an hour or two on a CD. It is easily converted to whatever format you want without a lot of hassle. 90% of the wmvs I see are of such awful quality that I'd BEG for them to be bigger just so I could enjoy them.

The problem is probably that you aren't compressing your video. The best option would be to read up on video compression and find a software option that meets your needs. Good capture cards pre-compress video with several settings, and there are other software encoders (from free to ultra-expensive) that can edit and compress your video from web-sized to DVD quality.

If you are going to do it right, I wouldn't just "feed" in from a capture source like a webcam, rather I'd get myself a good video capture card. They range from very affordable to very expensive, but almost all of them come with the kind of software you need. Then you won't be confined to blocky, awful or huge video, and if you want to make DVDs of your creations, etc., you won't be wishing you'd put more thought into them ahead of time.

(as an aside, with the cap card you can also run your cable to your computer and use it as a DVR, etc.)