How can I setup Time Capsule as an external HD.

Definitely not recommended. The Time Capsule is for your backups.

If you move movie files to the Time Capsule, access to the files will be very slow, with spotty, jerky playblack

and

If you move your "original" copy of a movie to the Time Capsule disk....you have no backup in the event of a Time Capsule problem.

You might consider adding a hard drive directy to the USB or FireWire port on your Mac. Then, Time Machine will back up both your Mac and the hard drive to the Time Capsule.

So, you have "original" files in one location and "backups" in another......a good backup plan.

Not sure why TC is not recommended to other than Backups. TC is also a wireless HDD. For me I just organize it with different folders.

Not sure why TC is not recommended to other than Backups.

TC is a dumb, slow hard drive, but it does work OK for backups.

But, locate anything like an image or video file that requires fast access from the application....and it will not be long before you have a corrupted library. I learned this the hard way with iPhoto and iMovie.

TC is also a wireless HDD

Wireless is twice as slow using the TC this way since the wireless signal must make a double hop during any copies or backups of data. The Ethernet ports on the TC are not enabled in this type of setup, so you cannot use Ethernet, even if you want to.

Call Apple Support and ask them for help in this type of TC setup.....and they will tell you they cannot help because it is not supported.

For me I just organize it with different folders.

Great. I assume that you have some "original" copies of data here. Can you detail how you make backups of these folders?

A very good plan!