Wow. It seems so obvious from the consumer point of view that

TV needs to be positioned as a slightly more convenient/expensive Netflix killer. Unfortunately, the movie industry are dinosaurs who don't understand the technology or what they have to lose by sticking to their same tired delivery systems. Also, they are very greedy expecting people to pay more for less when it obviously costs them far less to deliver the content digitally. For that matter, it has been obvious for years that releasing on-demand content on the same day as the theatrical release could be a winner too. People are moving away from going to actual theaters for movies because many of us have 50 inch or bigger HD home theaters sitting in our living rooms that offer better quality without the hassle and crowds. If movie theaters want to survive in the 21st century they need to offer a premium experience. For example, theaters that serve beer & wine, or dinner theaters etc. Right now, the couple of movies I see a year convince me more and more that the main appeal is that people use them as a low cost babysitting service so that they don't have to gasp

spend time with their kids. Unfortunately, this leads to theaters having to hire off duty police and even deal with lawsuits associated with unsupervised minors.
For me, I will continue to use Netflix and occasionally rip a good movie to my iTunes collection (I know breaking copyright on DVDs is illegal but we all know this is only because we have greedy/corrupt politicians who were paid off by Hollywood lobbyists when authoring the digital millennium copyright act.) I'm sure others will continue to download from bit torrent until a more attractive online solution is offered.
The one question I have is: How is Apple ever going to compete with the cable companies in this market? I mean Verizon Fios already has $3.99 24hr rentals that I don't have to buy a $300 box to play. Also, what is to stop Verizon or Comcast etc. from throttling bandwidth for downloads from the iTMS if they see Apple as a threat to their on-demand business?
I think Apple might want to look into taking a loss on the hardware for this business as I wouldn't be surprised if Microsoft or Sony would be willing to do this in the future just to control mindshare (of course cable companies already do). Look at the Xbox...M$ still loses tons on them just so they can control the living room for gamers. How long will it take them to put 2 & 2 together and do this for a movie box. After all, movies are still far more mass market than games. And before you say that they make up losses on hardware for Xboxes with game/accessory sales I already thought of that and I still think the mindshare/exclusive control of people's living rooms is worth a huge investment and possibly could be made up in some way with directed ad content, premium subscriptions, micro-transactions etc. It blows my mind that Google or one of the cell operators hasn't offered a discounted or free cell phone service that serves directed ads every time you make or receive a call on the screen. I know people hate ads but I bet they hate their large cellular bills more... The technology companies (Google, Apple, Microsoft) etc. are in a much better position to do something like this than the old-school entertainment/cable companies IMO...