MikeyNavy: First, Everyone I know uses iTunes not only for music, but also for (at least) TV shows. Not all subscribe to season passes, but even with a DVR, sometimes I miss an episode, or my wife deletes it before I see it, and I spend $1.99 to get a copy.
Next, you do not have to connect your PC to your HDTV to watch iTunes content. You can get 1) an Apple TV, which hooks up little differently than a DVD player and uses wireless or a wired connection back to your PC, 2) an iPod video, iPhone, or iPod Touch with a video dock connector can be plugged directly into your TV, and 3, some people who don't have HDTV, yet have HDTV or better computer screens feel completely confortable watching at their desks. (for a long time I have better picture quality and surround sound at my desk than I did in the living room). Your TV does not require an upgrade to watch iTunes content, in fact, it's not really in HD yet anyway (480i).
I can't really say the internet costs negate my downloading savings... I'm going to pay for internet anyway. You don't need a super fast connection (though I don't recomend the "lite" versions of DSL or Cable to dowload full movies).
DVD sales are partially dropping due to digital downloads, they're also dropping due to netflix and other unlimited movie rental options. Further they're declining because many people have been waiting for the Blu-Ray/HDDVD war to be over (and many got out of the habit of buying diring that time and have not started buying again, or they're further waiting for Blu-Ray to match DVD price per disk - I am)
The ONLY thing stopping me from downloading DVD through iTunes is DRM. If I can't make a copy onto a DVD disk, can't make it portable, loanable to family members, playable in multiple players in my house, and use the DVD as a backup to a computer crash, then for me, it's not worth the savings. If I can't have a physical copy, it's no use to me. TV shows and rentals I can handle. Watched once for $2-3, that's all I care about. For $15, I want a hard copy. It's why I still buy books at the store... With music, Apple has generous DRM rights, and lets me make several copies. Why not with TV and Movies??? Ask the studios!