It's because Netflix is easy and priced right.
For 80% of the people, it's all about ease and convenience. Real people with real jobs don't have time and patience to deal with all of the crap that media conglomerates want to put us through.
For example, I like to buy the BR/DVD/Digital combo packs of animated movies for my kids. BR for home, DVD on the road. I thought the Digital might be a cool idea until I discovered it was a DRM'd .wmv file that could only be registered to one device. Why the hell would I even bother when I can just run the DVD through CloneDVD Mobile or Handbrake and have a DRM free .mp4 in twenty minutes? Stupid.
Or, the Amazon MP3 Downloader. I pay for an mp3 album and for some reason I was unable to download it because the server was down or something. I come back to download it later and they tell me the window had expired and they wanted me to repurchase. Not only that, but I also had to download and install their software to bloat my system just to download it in the first place. Last I checked, Firefox's downloader worked just fine for me for the last 15 years.
And don't get me started on Cinavia. I think it's absolute crap that Sony wants to prevent me from being able to rip a Blu-Ray that I own and stream via my home network to the tv that I want. No, they want me to purchase a Blu-Ray player for every frickin' location in the house.
It's almost to the point that CD Rips and Cams from the theater are the only way to really do it anymore.
Netflix and Redbox are the only ones that get it. I pay one fee, once a month and don't have to worry about limits or caps or anything. I simply sit down and press a couple of buttons and I'm rolling, from any box in my house. Most people don't care if it's true HD quality. I don't see how Old School would be any funnier if I can see the features on Will Ferrell's face any more clearly. That's also why satellite and cable providers are nearly recession proof. You sit down, punch a button and you're entertained.
Or, as I walk out of Walgreens I see the Kiosk, slide my card and pay a buck for a DVD. If I forget to bring it back the next day, it charges me another $1. Makes sense to me.
I really think the idiots in Hollywood have no sense of reality. Money has probably skewed their thinking so badly that they are incapable of understanding the common citizen that puts the money in their pockets.