I have a newer LCD TV with the Auto-Motion Blur settings that that changes the frame-rate per second to magically make HD movies look like junk. You've probably heard of it.. the "Soap Opera Effect". Yes it is great for sports content on your HDTV but not so great for movies.
I just signed up for Netflix and started streaming some movies via my 2nd Gen. Xbox360 and to my suprise.. there was the junkie looking movies again. I disabled the Auto-Motion Blur setting on my TV when I set it up so I was quite confused.
Netflix' website was no help as it made no mention anywhere about frame-rate, and couldn't find any help here on the Xbox site either. I then got to thinking about my setup and what could possibly be over-riding my TV's settings.
Like most gamers, I want the best picture possible.. thats why I bought an HD TV in the first place and used an HDMI cable to connect my Xbox360 to the TV and left the component cables in the box.
The fix for the Soap Opera Effect on Streaming Netflix is to use the component cables instead of the HDMI cables. My TV reenabled the Motion Blur setting when I switched to the component cables and I had to turn it off again.. your set may or may not do this.
Just leave the cables in place and simply switch them out and change the input source on your set when you want to watch movies with Netflix on your Xbox360. It only takes a few seconds to unplug your HDMI cable and plug in the component connection on your console, but it makes all the difference when watching movies!
Hope this tip helps you if you have been experiencing incredibly frustration at this effect.