The company "rents" users a DVD player and DVD and allows them to control it via online streaming, for the cheap price of $2.
Today, Zediva has countersued the MPAA whilst demanding a judge sanction.
Zediva has claimed it does not need licenses because it is just "like" a brick-and-mortar rental company. When a customer rents a DVD, it takes it out of circulation, and does not create any digital copies.
Reads the countersuit (via Wired):
The only difference between watching a rented DVD on the DVD player in one’s living room and watching a rented DVD using Zediva is that rather than connecting to the DVD player with a short cable, Zediva lets users connect to the DVD player over the internet.