I'm not aware of any free programs that will do this, but there are lots of video translation programs about.
It's not necessarily a case that WMV is smaller than AVI, but it can be helpful to reduce the resolution and/or overall size of the picture in order to make the file smaller.
I have a couple of programs that I have used with some success in the past - PM me if you're interested and I'll send you the names of them and where to get them.