Since most commenters have not read the legal reference, here is what it says:
"...the following are not infringements of copyright: (11) the making imperceptible, by or at the direction of a member of a private household, of limited portions of audio or video content of a motion picture, during a performance in or transmitted to that household for private home viewing, from an authorized copy of the motion picture, or the creation or provision of a computer program or other technology that enables such making imperceptible and that is designed and marketed to be used, at the direction of a member of a private household, for such making imperceptible, if no fixed copy of the altered version of the motion picture is created by such computer program or other technology."
That's pretty clear. They are allowed to make temporary changes to audio or video content during transmission for private home viewing, provided only that they are modifying an authorized copy.
It sounds to me (IANAL) like they have a very strong case.
Of course, their record keeping needs to be spotless, guaranteeing that they never sell more copies than they have in stock, and that any specific streaming instance can be traced to a specific authorized copy.