There are pretty much three choices for streaming video right now:
1. Crappy encoder, low bitrate. This is what Youtube went with originally--they used FLV1 (Sorenson H.263) video, which at the time was the only real option (other than VP6, which wasn't much better). They went with 350kbps video. The result was pretty awful, but it worked for Youtube videos. It's free, so people will tolerate it. But for a paid service, such quality is absurd.
2. Crappy encoder, high bitrate. This is what Stage6 did; they used DivX, which, while better than FLV1, wasn't too much better. But what they did was allow absurdly high bitrates; I saw bitrates over 12 megabits per second for standard definition video! Of course, we all know what happened to Stage6; upon realizing the sheer amount of money that such bitrates cost, they went out of business, sort of like Wile. E. Coyote falling to the ground only after realizing that he was standing on air.
3. Good encoder, low bitrate. Facebook does ~600kbps standard definition video, and it looks great. Vudu does 1080p video on demand at 2.8mbps. Youtube now does 720p HD at 2 megabits. What do they have in common? They use x264 for encoding.
NetFlix chose to use VC-1 instead, and as a result they have 1.5 megabit standard definition streams that look like crap. And they don't even have an excuse anymore, because Silverlight supports H.264. Which is rather odd, actually, as Microsoft has been pushing for years to try to replace H.264 in the marketplace with their vastly inferior VC-1. Maybe they've given up because their campaign just isn't working.