I imagine the videos you can choose from have already been downloaded to a server. I really really doubt that they’re just streaming them. I can’t imagine that that’s even possible. So to me the answer seems obvious: airlines don’t have great internet service on board most planes, and the more people use it the worse it will be, so they make it as expensive as possible so you have to ask yourself whether it’s truly worth it (therefore leaving fewer people to us it). If the answer is no, then you can watch the free shows so you don’t complain about how tiny the seats are and how horrible the experience is overall.
Now, the question of WHY the internet service is so bad on certain airlines is a different thing entirely. This Fortune article seems to address it pretty well.