yes, this mechanism works good as long as the system has enough power. but there are many systems in particular for pvr which are maxed out (or close to). for vdpau to look smooth when you open some dialog when doing high quality deinterlacing, render buffers need to be bumped to 5. the goal is to drop or skip as less pictures as possible.
lateness detection in video player just works somehow. the system needs to stabilize because player does not know how many frames are queued. this could even be improved by avoiding a skip if there is a drop in the chain.
This is already a simplification. consider the case that you have to run some 60fps material on a system which is maxed out at 55 and playback should look smooth. theswissknife had this running some time ago. this code is far from hitting this performance but it uses the concepts.