I'm thinking, roughly, that for every person who would pay a fee (however low), at least 10-20 times more people would watch a movie for free. Once those folks see the quality, word spreads, etc, the freebies could then be scaled back to differentiate against netflix on lower price.
The important assumption for me here is that (quite unlike most other businesses) marginal/incremental cost is near zero. If the freebie was to mail an actual Blu-ray, for instance, then I'd be against it as this would be very costly. The free movie would cost near nothing, so why not cease this unique business situation and draw as much awareness as possible if it costs nothing? Keep in mind, nobody will have heard about VODWIZ, and will naturally question the streaming quality versus Netflix.
If, say, one of those additional 20 people converts to a paying customer, there would be double the base of paying users. The folks who would pay for content, will still pay for the content as they are unlikely paying for that one specific movie so nothing is lost!
Also, importantly, keep in mind the larger the base of subscribers, the easier it would be to attract more content which -- in turn -- would attract more subscribers.
It is the same logic why facebook/skype/google/amazon/itunes have such advantage ... it's not necessarily about being the best technology or service (although this certainly helps especially at the start), but eventually the size of network in-and-of-itself as an advantage ... at my company we refer to this competitive advantage as the 'network effect'.
Thinking longer-term, anything done now to grow the network of users and content will help tremendously in the future to guard against competition and perhaps even allow for higher margins.
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