Resolution now is fine, but could be better
For those of you complaining about resolution, keep an open mind and try it out for real.
Checking a couple of iTunes videos, I downloaded in December....Battlestar Galactica "Sci Fi Inside" and a Season 1 episode of The Office, they are 320x176 and 320x192 respectively. Both widescreen!
Being H.264, zooming the player to 200% (so 640x352 and 640x384) proves they are both very watchable at this resolution. Next zooming to fullscreen on my 17" Powerbook, yes, I can see aliased lines, but moving about 5 feet away from the computer screen makes them go away and makes it look like a regular TV signal. So the fact is, the resolution matters, but it's relative to how big the screen is and how far away you are. (An iPod Video screen 1 foot away from your eyes appears the same as a 42" plasma screen on the other side of the room)
So let's agree for now that 320x176 can work (a 2 hour movie at 750 kbps would be about 650 MB), and it's probably worth say $2.99 for a full-length movie. Now we can examine where Apple could be going...
Go to the Quicktime trailers page and download the 480p version of Benchwarmers. The quality that I'm seeing is nearly UNBELIEVABLE, as it has almost depth perception to it. It is 848x448 with a data rate of 2751 kbps, meaning a 2 hour movie would be around 2.4 GB. While this is impractical for downloading, if Apple can afford the bandwidth, it might work for streaming! Meaning give it a few minute head start and you can likely watch this movie "on demand", like recording and watching a show on a DVR in real time. For this exceptional quality, what could Apple charge? $4.99? $7.99?
(The 720p and 1080p versions are just too monstrous to be able to download and playback simultaneously on my 1 Ghz G4, so I wouldn't count on these resolutions being part of a new service)