Redbox has been very successful with a very similar model.
In fact, people complain about the Netflix cue-based system all the time.
Flash drives tend to fail catastrophic, they either work or not. DVDs and CDs have redunancies built in. You can scratch a part of a CD or DVD and another part of the disc will cover the error if it’s not too bad.
If you take a DVD and rip it, a 2 hour movie will run you about 7gb. A Blu Ray will be much larger. Price 8gb jump drives and see what you get. Then price the cost of a DVD? It’s much more
I am referring to raw data off a ripped DVD. Not one that is ripped and re-encoded with something like Handbrake and MKV container MP4 or x.264 encoded, which would reduce file size significantly
Flash drives would also be easier to lose. I doubt copyright protection as much to do with it as I’ve never run across a Blu Ray or DVD I couldn’t rip eventually, you can find a free program to do it for you.
DVDs and CDs are very old technology. They are kept that way to allow for back play. No one would design a DVD or CD the way it is now, today.
For very small values of “very old”. 
I could almost see this being an attractive business model for the studios and customers but not exactly as described. Flash drives have a couple of advantages that movie DVD’s do not. They can be written to many times and they can be made very, very secure if you place the contents in an essentially uncrackable virtual wrapper using a utility like TruCrypt. The studios don’t like streaming that much in general because they can’t control very well where the content goes and therefore the $$$ associated with someone watching it.
You could have a rental system in which each customer gets its own flash drive or just have a floating pool of them. You probably wouldn’t want to have flash drives dedicated to one movie like DVD’s are. They would be created on demand. Content could be downloaded to the drive through any internet connection or a kiosk. The movies on the flash drive would be stored in an encrypted wrapper and would self-destruct after a given number of views or a certain time has elapsed. The technology to do this already exists in open source form and is essentially uncrackable if done correctly. It is also very trackable by customer because the drives would report back which the studios would love. The advantage to the consumer is that much more content would likely be made available on demand as opposed to simple streaming. The disadvantage would be it would take some time to download several GB’s for just one movie but that won’t be a huge hurdle as internet connections get faster and faster.
Oops!
Well, I think you know what i meant. 
This is a good point. I haven’t seen any software distributed on flashdrives or SD cards.
CD’s and DVD’s are stamped out with content. Do you have to load data to flash drives?
Last year I decided to make a bulk distribution of my grandchildren’s pictures to my family. I though about flash or SD, but alread have a stack of CD’s. It was very cheap and easy to burn a bunch and drop the disk in the Christmas parcel.