There are a couple of issues with the way in which movies are currently distributed digitally. Most of the rental services stream movies. This allows them to easily answer the question copy protection since you don't really have a file to illegally copy. The problem is that this approach doesn't scale. Streaming a movie requires not only that you transfer hundreds of megabytes of data, but that the download always stays ahead of playback. The physical structure of the internet simply can't support millions of homes simultaneously streaming movies every night between 6 and 11 pm.
Another approach is to have viewers download the files. This improves the scalability since the download can take place overnight and doesn't have the throughput constraints that streaming does. The ugly specter of copy protection raises its head again, but the services that currently provide downloads (iTunes, Amazon Unbox) get around this by requiring that you either "buy" the file, use their proprietary player, or both. The only drawback to those services are that the pricing is completely unreasonable for what they're providing; NetFlix totally blows them away from a value standpoint. Downloading files will probably scale okay for a while, but eventually services will need to encorporate some distributed downloading capabilities like those used in BitTorrent.
So in the war of Blue-Ray vs. HD-DVD, the winner will be neither. Instead, the war will be won by hardware for getting movies from the 'net to the TV -- such as Apple, SlingMedia and TiVo -- coupled with download services that can provide:
- Scalable video downloading
- Monthly subscription plans – so the technology can improve without viewers having to flush their investment in "purchased" content
- Reasonably-priced purchase options for customers who want to transfer the pre-formatted movies to a disconnected device (iPod, PSP, in-car system, etc.)
- Flexible download options such as additional audio tracks and extra content
- Streamable previews so you can check out the first 5-10 minutes of a movie before committing to downloading the whole thing