Thanks to Karl Ellison for mentioning the Marx Brother's movie
"Horsefeathers" containing the background music of a nickelodeon
playing in the background.  I did too notice this.  In the scene,
you can see the edge of a piano, when Groucho is talking to Chico
at the bar.  I do not believe that the piano is the source of the
music, or if it was just placed on the set to make the set look
authentic.  Earlier movies with music usually had the instruments
off set.

Also, in another Marx Brothers movie, "The Big Store", the movie
is opened by Chico playing on a player grand piano.  The piano isn't
playing though -- it's Chico playing the piano, and when the camera
does a close-up on his hands, you can plainly see the door leading
to the spool box.  (The piano does not have a drawer.)

In the Abbot and Costello movie, "Comin' Round the Mountain", there
is a scene at the county fair.  In the background there is a carousel
organ playing, and at certain points you can see the organ inside of
the carousel.  I do not know of any movie completely surrounded by
the music of an automated instrument.  "Around The World In 79 Days,
The Saga Of Timothy Dishwater", is a musical with all of the songs
being from old piano rolls, but has yet to be made (a long story...).

Also, just a quick ending note about the preservation of player piano
rolls:  We will most likely replace MIDI in the future with some other
medium.  As long as there will always be the roll itself, either re-cut
or original that is still playable by a player piano, we have nothing
to worry about.  It's nothing that an international piano roll archive
can't fix.  And don't worry about the next generation -- the next
generation is talking now!

Happy Holidays,
Domingo Mancuello