I suppose if I am at the airport or on a flight, I may watch a movie--probably one of my favorites I have on blu ray that I would just put a low res copy on my phone--or use Netflix--but I haven't needed to as of yet.
Yes, the higher resolution of the iPhone 4 screen makes it a little easier to watch a full length movie than in the past--but I agree its not ideal. I do it when I visit Boston a few times a year since the trip is 5 hours or more.
Since my iPhone is my only unlimited data device its pretty much the only choice if I want to stream a netflix movie or HBO Go over 3G.
I've tried it a few times watching it from YouTube uploads or some streaming site.
Not my preference. My eyes get watery and I get sleepy. I can't even watch entire movies on my PSP with its 4.3 inch screen. Always my TV for movies with sometimes using my 5-year old laptop even if the resolution is poorer to the actual movie quality.
But I do have TV shows on my iPhone. I can tolerate 20 min shows much better. I have Family Guy Seasons 4-7 (70+ eps) and the entire 13 episodes of the Lucy & Desi Comedy Hour which runs at 50 min I downloaded from YouTube. For me to keep a video that takes up the most space, it needs to have great replay value. If I only plan to watch it once, I never keep it. That's why I don't have any movies on my iPhone anymore. Too long, takes up too much space, and won't view it that often. My iPhone is mostly filled with some of my favorite YouTube videos that run no longer than 3-5 minutes.