It was surprisingly difficult to get Netflix to stream smoothly on a Macbook 5,2 using Safari, or any other browser, on an external 1080p display.  Without going into painstaking detail, what I finally found to work well is to configure the external display resolution to 720p, enable display mirroring, and not use bluetooth for an audio connection.  That, and to use Chrome or Firefox instead of Safari for streaming.

The Nvidia 9400M video hardware is capable of displaying high-res video, so it’s disappointing that such configuration gymnastics are required to make Netflix work.  If you find a way to get Netflix streaming smoothly at 1080p on an external display with a Macbook running Lion, please let me know.  Not surprisingly, the old Macbook setup produces better external video quality than the iPhone 4S, but the iPhone configuration is much easier: just plug in the digital adapter and go.

Update:  While 720p Netflix streaming with Chrome or Firefox (with an info.plist update) is pretty smooth on Lion, it’s even smoother on native Windows 7 — just about perfect.  It looks like the best way to run Netflix on an old Macbook is with Internet Explorer 9 and Aero enabled.  That’s a good enough reason to use Boot Camp.