Specialty programming is the way
If you want to make Internet TV work, you need to start by offering specialty programming that isn't available otherwise. I'd start with foreign-language channels. Here in Tuscaloosa, the Hispanic population is booming, yet Comcast only offers a couple of Spanish channels, and none are Univision, Galavision, or Azteca America. You can get them via satellite, but installing a dish can be a pain in an apartment. We also have lots of foreign students at UA, many from China, Taiwan, and India. These groups would be a prime audience for a service featuring programming in their native languages.
There are other niche services you can do. Sky Angel, which offers religious channels, moved from sat delivery to Internet delivery. Obviously, Netflix has been promoting the hell out of its streaming service, and there are rumors that Redbox may do something similar. And I can't imagine why adult services haven't embraced Internet delivery yet.
IMHO, the missing piece of the puzzle is a box that is service-agnostic, where the end user can easily sub to what they want and download the software needed to decode and play it. Naturally, it would have to be very simple to set up and use, but if you can do that, you can then get the needed hardware out to lots of people. No need to have a separate box for each service, which would put a damper on adoption.
Niche services are where Internet TV can gain a foothold. Once they get established, more mainstream offerings will pop up.