Apple CEO Steve Jobs announced the move at the annual Macworld conference in San Francisco and said consumers will be able to rent titles directly through iTunes.
Users can then watch titles on their computers, iPods or iPhones, or download films through an upgraded version of Apple TV independent of a computer and watch it on TV.
The service will initially make 1,000 films available, including 100 in high definition, 30 days after DVD launch. New releases will be priced at $3.99 and older titles $2.99. High definition releases carry a $1 surcharge.
Users will have up to 30 days to begin watching a film after download. Once they click Play they can watch the title as many times as they like within 24 hours before the viewing window expires.
Apple will send out a software update for Apple TV within two weeks.
The day before Jobs' announcement, Netflix said subscribers who paid more than $9 a month would now be able to stream an unlimited amount of films and TV shows each month at no extra cost.