Actually I don't think the length matters as long as it fits on your hard drive. I assume it continuously streams from the file. Also, mpeg2 is the preferred format as it takes less cpu time.
Dream King

I was curious if it was completely memory resident or not so I performed some tests. Using the new Reliability and Performance Monitor, I switched DreamScene on and off. When off my CPU runs at 1 to 2% usage compared to 10% when on (according to a cpu gadget meter on sidebar). In the Perfomance monitor, I seen the memory increase but it does not appear to be accessing the hard disk.
So I would have to say Vista does attempt to load the entire file into memory if possible. That means that their probably are recommended size limits. Nebula comes in at 38 MB while Skylock Red is 45 MB. In my opinion, I'd set the max limit at about 60 MB.
If you use a program like photoshop, I would actually turn off or pause dreamscene for increased performance.

The ideal animation will be under 30 seconds long and be designed to seamlessly loop.