Hi Lyle,
The issue you are hitting with file is an unsupported format is a known issue. We are working to get a fix out to windows update. It tends to be intermittent, if you shut down and restart the app it sometimes goes away. Try doing this from Task Manager -> select Photos -> End Task
The ability to set as static tile is also available in 8.1. You can either find a picture and click on "set as" -> "photos tile". Alternatively, you can also swipe the right side->click "settings"->"options"->"shuffle photos on the photos tile" ->"off".