Netflix streaming quality depends on three main factors:
1. The speed of your internet connection
2. The type of video you are watching
3. The screen on which you are watching the video
Streaming quality is most negatively effected by a slow internet connection. This can cause the streaming video to load slowly or constantly re-buffer, which ruins the quality of your Netflix viewing experience.
Netflix streaming is designed to detect a slow connection, and as a result will deliver a reduced quality image. This makes playback smoother, but you lose a lot of on-screen detail.
On-screen detail is generally of reduced quality in Netflix streaming movies. Even with a high-speed connection you'll notice a degraded image during extreme action scenes. Overall, movies in which less happens on screen will stream in better quality.
The screen on which you are watching will also effect the quality of any video. For example, Netflix streams to iPhones, but the quality on an iPhone 4 screen is vastly better than on an iPhone 3. Likewise, HD screens will give better quality than standard television sets.