Netflix is beginning to experiment with streaming movies and TV shows on demand to PCs. Customers will soon be able to watch movies and TV shows like “The Office” without having to wait for the red envelope to show up in the mailbox.

The space is already extremely crowded: Amazon, CinemaNow, Movielink and a bunch of startups already offer some form of movie rental on demand. Apple sells digital downloads.

What is Netflix’s core differentiator? In the DVD rental-by-mail business, it’s logistics. They know how to get movies in-and-out of warehouses efficiently; most returns go right back out the same day. 60 Minutes has an interesting clip on Netflix logistics.

In the online world, it’s much harder to pinpoint Netflix’s strength. From a feature standpoint, Netflix brings nothing new to the table:

• Movies are streamed. You have to be connected to watch movies. Some of the competitors, including Amazon and Movielink, let you download a movie and watch them offline. (For example, on your laptop when you’re on a plane.)
• Selection is limited. Online movies/TV shows are limited to a selection of about 1,000 titles. Netflix offers more than 65,000 titles by mail.

The twist with Netflix is that online viewing is included with your Netflix subscription, instead of having to pay $2-$5 for each movie viewed. You’re limited in terms of the number of hours you can watch, depending on which subscription plan you buy. It’s an odd way to price them. Vongo offers unlimited downloads for $9.99/month.

The biggest challenge is that most people can’t watch the movies on their TVs. Getting the movies on to the TV is essential to winning in this space. There are a number of companies that are in a better position than Netflix to do this: Apple (with Apple TV), Moviebeam, Tivo and all the cable companies.

Apple will likely get a substantial number of people to buy their box, but it’s harder to get people to spend $10-$13 to buy a movie than $2-$5 to rent one. MovieBeam has a lot of issues. Tivo is probably one of the best positioned companies to provide such a service, but so far hasn’t announced any plans.

The 1,000-lb gorillas are the cable companies. They’ve got many advantages that are going to be tough to overcome:

• A box already connected to the TV in many homes.
• Fat pipes (that they own). While the online movie providers are struggling to get sub-VHS quality video to you, Comcast already delivers HD-quality movies. And all that bandwidth costs them a lot less.
• Established billing relationships. It’s easy to make impulse purchases and have them added to your cable bill.