Netflix announced this morning that it was removing the usage cap on its "Instant Watching" feature for unlimited plan subscribers. This feature allows subscribers to choose from 6,000 titles (and growing) to stream and view on their PCs. Up until now subscribers received an allocation of streaming hours based on their monthly subscription level (e.g. 17 hours if subscribing at $17/mo). Now the hours will be unlimited. It's a smart move for Netflix and a great value proposition for Netflix subscribers.

AP first reported the change yesterday and is depicting it as a preemptive move against Apple, which is anticipated to announce tomorrow that movie rental downloads will be available in iTunes. The price point is expected to be $3.99/download. This is a major departure for Apple's iTunes, which has, of course, stuck religiously to its purchase download model for both music and videos.

Others have also depicted Apple's move as a direct strike at Netflix, but I think this battle is illusory. Rather, I view Apple's introduction of rentals as clear competition for the likes of Movielink, CinemaNow, Amazon Unbox, XBox LIVE and other rental stores, but not a blow to Netflix. The value propositions are very different. That's because Netflix very wisely has made the Instant Watching feature a value add for its subscribers, not an incremental fee.

As a $16.99/mo subscriber myself, I love the fact that Netflix is unmetering Instant Watching, and am hard-pressed to see why anyone would drop their subscription in favor of Apple's rental model, unless they envision consuming a lot of movies on their iPods (now there's a slim segment of the population!).

From an economic standpoint alone, the breakeven is only 4+ movies, which is likely well below the monthly consumption of most of Netflix's full unlimited subscribers. And with Apple's rental model, users are still subjected to all the same online movie limitations all the other services have suffered from: no easy playback on TVs, lack of portability, viewing window limits, etc. Granted iTunes downloads enable watching on-the-go (vs. Netflix's streams), but I don't see that as a big differentiator. With Netflix you get the best of DVDs' advantages and now unlimited online delivery.

Now, if Apple were to pursue subscriptions, that would be a direct attack on Netflix. Yet even this approach might not be that successful. The fact is, Netflix has spent heavily on marketing over the years, and its strong brand awareness and 7 million subscriber base are quite meaningful advantages.

Online movie delivery, whether rental or owned, still has a long way to go to achieve mainstream success. Apple will certainly nudge the category forward, but not dramatically. Still, Netflix needs to remain aggressively on offensive to retain its leadership mantle. This is a category with lots of moves yet to be made.

Am I missing something? Post a comment and let everyone know!