Not sure how much help I can be, Jon, but here is what I am doing. I created an m3u playlist using Windows Media Player from my laptop, using a mapped drive (drive letter) to my LMCE media share (on another Windows PC), and got:
#EXTINF:0,alien antfarm- smooth criminal.mp3
\\192.168.80.251\media\public\data\audio\Music\alien antfarm- smooth criminal.mp3
#EXTINF:0,alphaville - napoleon dynamite - forever young.mp3
\\192.168.80.251\media\public\data\audio\Music\alphaville - napoleon dynamite - forever young.mp3
#EXTINF:0,armand van helden - Spin Spin Sugar (remix).mp3
\\192.168.80.251\media\public\data\audio\Music\armand van helden - Spin Spin Sugar (remix).mp3
As you can see, it creates absolute paths based on UNC format even though it was from a drive mapped with a drive letter. I guess that makes sense to make the playlist more mobile on your LAN. That was by dragging and dropping the files into the playlist from a folder. When you do the same thing from Windows Media Player's own media library, it seems to create relative paths starting ../..
Either way, it is likely to cause problems reparsing the paths so they relate to LMCE, as you are obviously testing now. Not sure how you are going to know what root path to splice in at the top, as it won't always be obvious which share LMCE has linked in... for me it would be:
/home/public/data/audio/Windows Share media/Music/etc...
I guess you can key the parsing on "public/data/audio" and replace, but then how do you know to put in "Windows Share media " after this, as it could be any number of shares....? Search perhaps?
Also, this is just Windows Media Player, other playlist editors could use different path roots, or even more relative path roots.... Do we standardise on one playlist editor that has wide acceptance and broad platform implementation?