Blockbuster has been crushed by Netflix and the trend will only continue.
I think you're giving Netflix a little too much credit here -- they were a contributing factor, sure, but so was RedBox, Cable/Satellite company VoD/PPV, Internet (Amazon, Hulu) VoD, PS3/Xbox online movie rentals, and good old fashioned Internet piracy.
The X factor in all this is what the Sat providers might do before then. They must either provide something new that keeps them ahead of a netflix/hulu/other net solution or find a way to lower costs to be in line (read: within 15-20%) of a $50 per month price point (for the high end content they provide now).
When someone comes out with a service that:
- Has consistent video quality (no occasional buffer issues ala Youtube, Netflix)
- Carries live HD sports network feeds without the macroblocking issues that plague GameCenter Live / ESPN360 / etc.
- Allows for channel surfing
- Can scale to 18+ million subscribers
Then we'll have a starting point to the service. Google is currently the largest streaming video providers on the Internet, and current estimates place their delivery infrastructure as being able to support 2.5-3.5 million simultaneous viewers. The company that pulls this off will need to be vastly bigger than Google. Dish has 14 million subs, DirecTV has 18 million subs, and Comcast has 23.5 million subs.
Let that sink in for a minute. Google with all of its size can only support 25% of Dish subs, or 19.4% of DirecTV subs, or 14.9% of Comcast subs -- and not all at the same time. To seriously challenge even a single satellite provider the Internet-based TV provider will need to have massive infrastructure on a scale that we've never seen before.
The source of the video content isn't the only issue. The ISPs with the most bandwidth out there right now are the DOCSIS-based MSOs. (Comcast/Cox/TimeWarner/etc) DOCSIS is built to take a 6MHz channel and use it to provide a 38mbps downstream channel from the CMTS to cable modems. That 38mbps is shared by every single modem on the segment. When DOCSIS was first deployed in the late 90s there were upwards of 1200-1500 subscribers per downstream channel, today that number is down somewhere around 250 subs.
So do the math: 38,000,000 bits per second / (8 bits per byte) = 4,750,000 Bytes per second.
60 seconds * 60 minutes * 24 hours * 30 days (avg month) = 2592000 seconds in the month
That means in a month that downstream channel can move 12,312,000,000,000 Bytes, or 12,312GigaBytes.
12,312GB / 250 subscribers = 49.248GB/mo per subscriber if equally divided across the month.
DOCSIS 3.0 is improving that because they are bonding 4 downstream channels, but still that only gets you to 200GB/mo per subscriber in actual download capacity. But even these numbers are flawed because it assumes uniform usage across the month 24 hours a day; with streaming video you're going have people all competing for capacity during the peak evening hours.
For mass adoption of Internet-based video to succeed these networks are going to need to be scaled up much more aggressively. That would likely drive the cost of your Internet connection to be more than your existing Internet+TV bills before you've even purchased any content online.