• by Wendy Davis , Staff Writer @wendyndavis, January 16, 2007

Netflix today took a significant step towards online distribution with the announcement that it will start rolling out streams of movies on top of its snail mail service.

The company will offer select subscribers now paying $18 a month for three rentals at a time the chance to also stream up to 18 hours of video for free. Netflix plans to extend the offer to all subscribers within the next six months.

In theory, the move potentially cuts back on some of Netflix's downsides, such as long waiting times for certain movies or TV shows. In practice, however, since service is launching with just 1,000 titles, consumers still might have a long wait for particular videos.

Also, the service, which only runs in Windows and requires users to first install new software, is bound to be buggy. In fact, The New York Times reported today that the installation didn't go well: "When a reporter tried the system at home, however, the process stalled because of a mismatch between the version of Microsoft's antipiracy software expected by the Netflix viewer and the one loaded in the PC, and it took about 15 minutes to fix the problem with the help of a customer-support specialist. A Netflix spokesman said the problem was known, but occurred only rarely," wrote the Times.

Another detriment is that users can only watch the videos on computers--at least until there's a good way to transfer from the PC screen to the television screen.

Eventually, of course, the glitches will be resolved. But by that time, it's not clear what role Netflix, or any other middlemen, will play. Once studios realize that consumers are willing to download or stream movies, the filmmakers might decide it's time to step up the competition with Netflix and Blockbuster by increasing their own digital offerings.

Either way, the market is only expected to grow for now. A new report from eMarketer forecasts that U.S. consumers will spend $3.6 billion this year on digital music, TV and movies, up from $2.4 billion last year and $1.3 billion in 2005. By 2010, spending is predicted to reach $7.8 billion.