By Prince McLean and Kasper Jade

Published: 01:00 PM EST

Apple is believed to be wrapping up a new feature in iTunes 8 that will allow users to stream their iTunes video purchases directly from the company's servers for playback anywhere, anytime without eating up local storage.

Dubbed iTunes Replay, the service would allow iTunes shoppers to build out their digital video collection without worrying about the space needed to store the often hefty media files. It's unclear whether Apple plans to charge for the service, which is said to support both iTunes Movie and TV show purchases.

One of the main complaints users have with video purchases on iTunes is that they are forced to either throw away their files after watching them, or find a place to store the large files either on their hard drive or by burning them to DVDs. By storing their video content for them and allowing users to stream it for viewing as often as they want, Apple would essentially be offering a media center alternative.

iTunes Reply on other devices

The iTunes Replay service could also improve the experience of the company's Apple TV set top box, allowing users to stream purchased media directly from Apple's servers without ever syncing or copying files between Apple TV and a computer running iTunes, and without filling up the devices' limited hard drive space, which currently tops out at 160 GB.

The ability to stream purchased content directly would also benefit users of mobile devices such as the iPhone and iPod touch, which have an even greater limit on local storage capacity but already have the ability to stream QuickTime content directly over the air.

Amazon's Video on Demand (formerly known as UnBox) and the Instant Watch service from Netflix already provide video streaming, but both involve DRM hurdles erected by the studios that complicate the experience, as they are typically viewed through a web browser (although Amazon has an appliance partner deal with Tivo, and Netflix has partnered with Roku and the Xbox 360).

Apple's mobile devices, iTunes and Apple TV already accommodate the DRM protection the studios demand for playback of their content, meaning that no new layers of complication are necessary. Additionally, Apple has a wider selection of video content to choose from in iTunes.

The disadvantage to streaming video content rather than playing it from a downloaded file is that users will need to maintain high quality Internet bandwidth throughout playback, or face interruption as the stream is buffered. Streaming playback of HD content also typically requires better than DSL (1.5 Mbps) service.

If Apple continues to offer both downloads as well as streaming video on demand, it will remain differentiated from streaming-only services like Netflix Watch Instantly in that users on a slower Internet connection will be able to download HD titles in advance and watch them via local playback, or even unplug their Apple TV and bring it and their downloaded content to a location without Internet service for viewing.

Apple gearing up for new streaming traffic

iTunes Replay would arrive on the heels of last month's report that Apple has shifted its online content delivery strategy to include a provider in Limelight Networks, joining longtime Apple partner Akamai Technologies. Having two different providers could help greatly optimize the delivery of streaming content to the millions of customers who use iTunes.

Frost & Sullivan analyst Dan Rayburn connected the change to Apple's booming digital download business, which he said is growing at a "crazy" rate.

"We already know that no CDN [content delivery network] has unlimited capacity and can only handle so much traffic at any given time," Rayburn said. "If you are Apple, using more than one CDN is just smart business."