but the pirates do use it. its the defacto standard for scene released bluray rips in 720p and 1080p format, due to it being a convenient container for packaging multiple audio signals, subtitles and x264 encoded video and being all FOSS. its also a very popular format for anime, due mostly to its multiple audio and subtitle strengths.
the piracy scene decided on x264 mkv for various reasons but wide compatibility probably wasnt one of them. potential for wide compatibility, open standards and high quality were probably bigger concerns. im pretty sure there werent any hardware xvid players around when they decided that that was the best option for dvdrips.
the playstation 3 and xbox 360 can play x / h264 but not within the mkv container. this means its pretty simple and quick to convert on your pc, but more importantly it means that the console's hardware is fully capable of such playback, its merely a software limitation and this'll get sorted in time.