I read that on November 19th, the interface for the 360 will change to include a place to download movies/TV shows and Netflix is involved. Should be interested to see how this plays out. You of course have to be a Gold Member of XBox Live for it to work which $7.99 a month and then a member of Netflix.
i know this is kind of an old post, but i recently started doing this. The quality is A+ if you have a good Internet connection, personally i would say to hard wire your connection and not use wireless. If multiple people are using you network in your house and the bandwidth goes up, the movie will pause and re-buffer itself.