I too have been having problems with this ever since Netflix switched to Silverlight. I've also seen discussions of the problem plagued with misinformation and assumptions from people who don't have the problem and seem to insist that, therefore, the problem simply doesn't exist for anyone. I'm a professional cinematographer with considerable experience in encoding and frame-rate conversion issues, for what it's worth, and this seems to be the skinny:
*It's not a client-side bandwidth issue
*It's not a configuration issue
*It's not a judder effect caused by frame/refresh rate mismatching (my TV supports 23, 24, 59 & 60hz, and switching between them yields no difference in playback; furthermore, the effect doesn't look anything like judder)
*It's actually not a matter of jitter, either --- it's clearly dropping frames
*Despite this, it's not a performance issue (I can chew through Blu-rays in software playback, with post-processing), and most baffling, the Netflix stats console claims that no frames have been dropped
It's bad enough on my end that, for the most part, I never bother streaming anything from Netflix. Streaming from all other services --- Hulu, Fox, CBS, NBC, SouthParkStudios, etc. --- is silky smooth. I literally only have problems with Netflix's service. The problem has not been ameliorated in any way by updating to later versions of Silverlight, and it makes no difference whether I use hardware acceleration.
What complicates the issue is that, as has been noted in this thread, some of the content on Netflix is badly encoded in the first place. However, I'm affected by severe stuttering in *all* content, and the stutters are *not* reproducable, but are completely random --- thus ruling out the quality of the source itself.
My own research (over the course of months, as I really would like this to work: Netflix actually has quite a few notable films that have only been released in HD through their service; stuff like Stuart Gordon's "Edmond" and Cassavetes's "A Woman Under the Influence," which aren't on Blu-ray but are available in great-looking HD streams) has yielded some strange info. Unsurprisingly, Netflix apparently has a rather bizarre streaming implementation that is generally considered to be inefficient; apparently each title has upwards of *10* different encodes, to accommodate various bandwidths across various devices (for instance, Mac/PC encodes are done in WMV3 or VC1, whereas the PS3 get AVC encodes, etc.). This creates a large amount of overhead on Netflix's servers, and get this, apparently Netflix's way of dealing with network saturation is to drop frames on the server side.
In other words, if there's not enough bandwidth to go around, Netflix will drop frames on their end, which would explain why the console stats on the client's computer would claim that no frames have been dropped: technically they haven't, as the client computer has indeed rendered all the frames that were delivered to it. If this is the issue we're seeing, then ain't nuthin' we can do about it except complain to Netflix. Who, of course, swear up and down that Nothing Is Wrong.
However, I'm not certain it's that simple, or if what I've read is even true. I'm not at all convinced that frames can be dropped before decoding the video, especially with highly compressed, bidirectionally predictive codecs like VC1 and AVC. Also, I have noticed that disabling Aero in Windows 7 improves the smoothness somewhat --- but it also causes massive, unwatchable V-sync tearing. In any event, this seems to be a very complex issue, and the real problem is Netflix's refusal to acknowledge it, even if many users don't have/notice the problem.
In fact, I suspect far more Netflix users are affected by this than we think, and they probably just don't notice it or don't care. In my experience, most people can't notice 24/60 judder even if you sit down and point it out them. And heck, a lot of the people I know watch entire movies in atrocious YouTube encodes, something I can't put up with for more than a few minutes. Visual-motion acuity is the privilege/curse of the few, I think, and we're going to have to suffer until Netflix either upgrades their streaming infrastructure or switches to a more efficient system. Why they didn't initially go with VP8 Flash encodes, which are directly scalable from 360p ---> 1080p and are supported by pretty much everything, is beyond me; oh wait, it's probably because Microsoft paid them a backend to use their failing 'alternative' to Flash. Until then, there's always Hulu