mplayer wants to read from standard input (you can use keyboard shortcuts in the terminal as well as in the mplayer window) and to display messages on standard output. When you run it directly from
xinit, its standard input and standard output are connected to the same terminal that you ran
xinit from. Since
mplayer isn't the foreground process on that terminal, it can't access the terminal: it gets suspended with a SIGTTOU.
A workaround is to redirect standard input from
/dev/null. (Redirecting stdout and stderr doesn't work, mplayer still gets suspended with SIGTTOU, I don't know why.)
xinit /bin/sh -c 'exec "$0" "$@" </dev/null" mplayer -fs /usr/local/movie.mp4 "$@" -- :1