My question (without any intent to trivialize what Netflix is doing) is, isn't that just a good-old caching system?
But it makes me wonder if it would be possible to create a distributed, localized caching system? For example, if I watch The Avengers, my machine could be configured to cache a part (or all) of the movie. The more people watch it, the more it is distributed. Since Netflix can correlate location data with what movies are watched, they can target certain areas to cache certain movies more aggressively. When the next person in my neighborhood watches The Avengers, they would pull part of the movie from me (maybe the beginning until the rest buffers) and cache another part of it themselves for the next person in line. That way all the people in my neighborhood or adjacent neighborhoods don't have to pull the entire movie across the internet every time - instead, we help each other watch movies with higher quality.
On second thought, this may not be cheap considering the amount of development that may be required (and, at the end of the day, someone has to pay for this storage - although Netflix could, for example, offer personal mini-caching boxes in exchange for a monthly discount), but it's fun to dream about a sanctioned, decentralized, peer-to-peer movie service.