Hmm, okay, where to start?
Let's talk about the poor quality of Netflix video stream. At its best setting, for native HD content, Netflix will stream about 4.8Kbp/s. The native BluRay HD video stream can run up to 40Mbp/s. Realistically, it rarely exceeds 28Mb/s.
Now, to be fair. If you have a standard definition television (480i), you will never be able to see the differences between HD content and regular analog content. If you have large screen HD television, which will support 1080p, then you can ("can" being the operative word) see a huge difference in the quality between a Netflix stream and the native HD stream from a BluRay player.
As to the resolutions.
Standard DVD: 480p (most DVD players only do 480i, data stream up to 24Kb/s)
Line doubled DVD: 720p (depends on the doubler, it also might be 720i, data stream up to 24Kb/s)
Native HD content: 1080p (data stream up to 40Mb/s)
Those are lines of resolution. Netflix best data stream is far less than half the bandwidth of standard DVD. Even a good line doubling DVD player will look better, with regular content, over the Netflix HD stream, if you have a really good HD television. While the native stream of a good BluRay player is about 200 times faster than the stream from Netflix.
What difference does the stream rate make? Ok, in any MPEG compression scheme the data rate dictates how lossy the data stream will be. The slower the rate, the more information is thrown away. What Netflix is counting on is you do not have a native version of the content they are streaming to you. And/or you do not have a high quality television (most people do not).
Now, MPEG4 (H.264), for BluRay, is a better compressor than the MPEG2 (DVD content) is and does a better job of removing artifacts from the content stream. This is also what Netflix counts on. Fewer artifacts translates to a perception of good quality video. This just means they can get away with a highly reduced data stream for native HD content with most people being content with it.
Native HD content, via BluRay, is very difficult to decode and display. Just because a television claims it can do 1080p, does not mean you will actually be able to get the best visual experience available.
Bottomline is this. If you are not willing to purchase a really high quality HD television, then there really is no need to go BluRay at all. However, if you do go the high end route, BluRay content is so sharp and clear you almost feel like you can stick your hand into the scene. It is truly impressive.
Personally, I hope BluRay dies a violent and sudden death. The licensing fees are absolutely rediculous and amounts to nothing but greed run amok, which forces the price of the content to stupid heights.
Whether you like Netflix, or not, the quality cannot help but be worse than the native data stream from any high quality, local hardware.