I actually think people would be willing to buy episodes that aren't TV rips if they got to keep them (not the iTunes rental thing) and it was available online as episode goes on air. Have one price to stream and one price to buy. The standard tv season has 22-24 episodes, charging $3/ep for a full download is manageable and still works out to more than a DVD set. Depending how much tv you want, it can also work out to less than paying for cable.

TV execs want to budge as little as possible. If they actually rethought their business strategy they would have a better chance of competing with free streams, but not if they are half-assing it by only having new episodes on netflix instant a while after they air. Even the next day isn't fast enough, because anyone who likes the show enough to pay for it already started downloading it 15 min after it was finished.