Sounds like mencoder's behaviouris dependent on whether it's connected to a terminal or not. If so, you want to look a pseudo ttys. I'd look at IO::Pty, possibly called via IO::Run.

By the way,

$arg1 =~ s/ /\\ /g;
$arg2 =~ s/ /\\ /g;
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is very badly done. Use the multiple argument form to avoid having to quote at all.

open(CONVERSION, '-|',
   mencoder     => $arg1,
   -oac         => 'mp3lame',
   -aid         => 128,
   -ovc         => 'xvid',
   -xvidencopts => 'bitrate=-1',
   -vf          => 'scale',
   -zoom,
   -xy          => 320,
   -o           => $arg2,
);
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