Slowly I've been ripping my DVD library to H.264 MPEG4 with AAC audio. Just like music, I find it really nice not to have to have a huge set of shelves just to house all my media..
Its too bad that Hollywood paid off Congress with the DMCA so that there will never be an easy way for users to rip their movies directly into iTunes like music. This would ease the transition to all digital purchases for movies... The digital copies Fox launched is a good step but what about the huge number of DVDs people aready own. The studios are too greedy expecting everyone to repurchase that content as a digital file when we all have it sitting on our shelves anyway.
I think that it would be nice if they coupled the

TV with Time Capsule to make a big home media server, but at the same time; I wonder what the point of buying any movie in digital format is, if you can rent the same content On-Demand for <$3.00... Of course the answer is if you intend to watch the movie more than 3 or 4 times... Still, even if you do, it still may be difficult to justify purchasing a movie, since you have to pay for the storage as well...
The digital rental model looks to be a slippery slope for the studios to me as they will eventually lose lots of money if everyone decided to do this. How many people buy movies now and watch them only 1 time... Plenty... If everyone only rented because a movie is always available, studios are potentially losing 3/4 of their revenues not including some gains from the decreased distribution costs...
This coupled with the fact that eventually the cable/DSL providers will get it together and compete here, make it hard for me to see Apple getting too far in digital rentals. Also, internet neutrality isn't totally a reality yet and certainly if the Cable/DSL providers wanted to get ugly they could throttle or ban incoming/outgoing traffic from iTMS... Certainly the FCC has some fair competition rules and measure but who knows under what guise the ISPs could justify doing it...
Finally, I do agree that a subscription model (especially for TV shows) could be a good idea. Especially if Apple can figure out how to give away their set-top box for free. The hardware is priced right but American's are used to paying nothing for their set-top boxes. I know some Tivo user's would beg to differ, but the vast majority just get the free one from their cable provider...
If digital content distribution for movies catches on, perhaps the market will grow due to impulse purchases and make up for lost revenues due to rentals...