How can you provide a rental service to people during the 28-day DVD sales window without breaking the license terms? That's basically pay-per-view, and PPV is dead from the distributor's standpoint, there is almost no money in it now.
Part of the problem (for the distributors) is not that netflix rents to everyone, but that they don't charge any late fees. for years the video business made profit in 2 ways: new hit films that everyone wanted to watch but couldn't buy yet, and late fees - both of which subsidized all the other movies that didn't attract such a big audience but still took up shelf space. Well Netflix's business model depends on massive volume and warehousing, and it turns out consumers are willing to wait the 2-3 days required for postal transfer. And since there's no late fees, if there's a movie you really love you could just keep it out for a month and watch it 20 times until you're sick of it, whereas previously you'd rent it, go crazy about it, and then buy the DVD because that was much more economical than keeping it or wasting time at the video store waiting for it to go back on the shelf so you could rent it again.
So the problem is not that most movies are crap, because only a very small number of movies appeal to almost everybody; most people only like a narrow range of genres and actors and find others uninteresting. Furthermore, we've only been able to rent videos/DVDs for about a single generation; before that the only way to see great old movies was in art theaters and on TV. Now you can fit the 100 greatest movies of all time onto an IPod, goddamn. It's easy to be sniffy about what's on at the theater when you can hire a comfy chair for the price of a few lattes and pull a century of movie greats out of your pocket or laptop bag.
Obviously the answer is 'make something awesome' and people will throw money at you. But this is quite hard to do. I'm in the middle of making a somewhat awesome little movie right now (today is a day off) and we're doing it in a very hacker-ish way with a tiny budget in the 5 figure range. But in the movie business you can't iterate, you have to commit and ultimately we, the makers, only have our own feedback and critical skill to judge the project on while we're making it - so in startup terms, you are stuck with a very high burn rate, and you have to deliver a lot of (entertainment) functionality in your first release - you don't get to do a public beta, nor can you make any money by releasing a fabulous film that's only 5 minutes long. When people want to watch a movie, they're expecting 80 minutes minimum, and the bare minimum length of time/money to go from concept to delivery is 6 months and $25,000. You do hear bout people doing it for less...as part of a marketing campaign. No matter how passionate you are or how fast you work, writing, editing and shooting take up time during which you still need food, a place to sleep and a moderately fast computer. In short, we lie about these things in a desperate attempt to engage your attention :-)
If you begin with a decent-sized budget, then you can presell into overseas markets, but to do so you'll need famous names, which generally don't come cheap.
On any size budget, you also have to invest a lot in marketing (like 50-60% of said budget for optimal results) so you can open well in theaters, because for most films, the theatrical release is not profitable. You only hear about the big grossers - and in any case, the bulk of that money stays with the theater owner. Most films lose money or barely break even at the box office. The dirty secret of the movie business (for those thinking of getting into it) is that the theatrical release is just a giant advert for the DVD. You spend this huge amount of money on marketing in order to establish your film in the public mind as 'a real movie', and to provide a moment of recognition when they see your DVD available for rent or purchase - 'oh yeah, I never went to see that! What the hell, I'll watch it now'. It's incredibly hard to get people to even rent your film if they've never heard of it or seen an advert for it.
And all that goes times ten for getting people to buy it, which is where you have the potential to make some decent profit. If that isn't there, then investors are less likely to put money into films because the (significantly high) risk isn't justified by the (comparatively low) rental profits, unless the film is a relatively sure thing due to the combination of spectacle and star power - but as people often complain, such films tend toward the bland, with obvious stories and pg-13 ratings.
I have to say I'm rather with Warner Brothers on this one, and hope the other studios back them up. Partly because I can see benefits as a film consumer in studios having a more stable profit model, but also because as an indie filmmaker, a 28 day DVD sales window at least gives up-and-coming filmmakers a month to sit on shelves and be seen by consumers, who might later spend money on renting the film because the title is vaguely familiar from a previous visit to a store.
Excuse the rambling explanation. I just get irritated by people like this TechCrunch writer who have no idea wht goes into making and selling a film and seems to think they pop out of a machine like bubblegum.