The main factor in online distribution is your internet connection speed - you don't want to spend ages downloading your favourite flick while you can just drive to the store and grab it in less than fifteen minutes. And not everybody has a 1 MB per second connection. So it could take a while to hit mainstream. Then not everybody has an Xbox 360 :-) The install base of Xbox 360 is just around ten million while almost everyone has a DVD player nowadays.
But, people with Xbox 360s are already making the switch to digital distribution and this is the place where it really shines:
You can start watching as soon as a certain percentage (called the buffer) is downloaded - enjoy it while the movie is downloading in the background (much like YouTube). The HD (High Definition) movies on Xbox Live feature much better compression so it takes up less space (and hence less download times) while maintaining a great picture quality at 720p resolutions. Besides, these rentals automatically expire so you have no worries of running out of hard drive space. And look at it this way - you don't have to get your butt off the couch (or your house, for that matter) to rent a movie - how convenient!
Microsoft has also reported that Xbox Marketplace has already moved $110 million worth of content in just 8 months - and that's no joking matter! Sure, there is the potential, but I don't see digital distribution as a real threat to DVD rentals in the near future.
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