So many comments, so many people who have not tried this feature.
When the XBox 360 update came out, I was one of the first to download it. After the download, I saw the Netflix feature and decided to try the free 30 day offer. I opened my account on my PC, selected a host of movies to stream (Heros seasons 1-3, The Office seasons 1-4, Logans Run, Kelly's Heroes, ect.) and finished the setup with my XBox.
There is some buffering done, I don't know how much is buffered whether it's 3 seconds or 10 minutes - don't know. I do know that my cable ISP had my limit set at 4 Mbps, so almost every time I would watch 2 minutes, then be alerted that my cable speed had 'slowed' so the download was changing to support my lower cable speed. Usually, this wasn't really visually obvious (I have a 120" HD 1080p projector) - the picture quality was what one would expect on an over-the-air antenna. Not great, but certainly watchable.
I later upgraded to a 6 Mbps internet package, and the picture improvement did improve. Sometimes I'd say that it was comparable to a DVD, other times more like a good VHS tape. All in all, viewable by any person who doesn't want to whine about non-Blu-Ray quality.
On my screen, the picture was perfectly acceptable. I wouldn't keep Netflix around if it weren't for the streaming video. I get UNLIMITED streaming with the lowest package they offer (~$8/month). The movie selection on streaming is extensive enough that when there isn't anything to watch on my Dish - I keep myself perfectly content watching something from the 10,000 movie selection. The contents do change every couple of months - so there is always a variety of stuff to stream.
Is it better than owning the DVD? yes and no. No, the quality isn't always as good as a DVD. But, yes in that a great deal of what I watch are movies I wouldn't be interested in buying and storing. Some movies are watched simply because they are 'classics' and you need not own them. Like "Logan's Run", "Clockwork Orange", the original "Omega Man" - for me, watching them once every 'x' years is often enough.