The technology consists of a small box or adapter that plugs into your television, although some newer televisions come with it built-it, as do many Blu-ray DVD players. It has to be connected to your internet router; this can be via a wire or more commonly wirelessly, which is often more convenient as it removes the need to string wires around the house. A number of companies make these adaptor boxes; an early leader was Apple, which is now on its third generation. Western Digital, Sony, LG and Technika (Tesco) all make Smart TV boxes. Another contender is Roku, whose diminutive adapter at the time of writing is just £39.99 in some stores.
These streaming boxes are not for watching live TV. Rather, they provide a set of channels that show recent programmes and you choose what and when to watch, hence the phrase 'on-demand'. Perhaps the best known service is the BBC iPlayer, which most of these systems incorporate. With iPlayer, you can watch a selection of programmes from any of the BBC's channels. ITV, Channel 4 and Five all have similiar players, although they are less widely available.
Another common use is for movies on-demand. This is the modern replacement to the old video store; instead of searching through dusty shelves you have online access to a library of movies, comprising thousands of movies old and new. Whereas the TV channels are usually free, these movie services are paid services, either subscription-based or pay-as-you-go. The best known ones are Netflix, Lovefilm (Amazon), Blinkbox (Tesco), Apple iStore and Now (Sky). It is fair to say that the movies aren't always the latest and greatest on some of them, although the Now service has some advantages here (it is the most expensive - a case of you get what you pay for). Sky have also said that programming from Sky Sports may become available. Now can be watched on Sky's own HD boxes or on the Roku player.
This will seem strange to some overseas readers, but to watch television in the UK you need to have a license and it is a criminal offence to watch without one. But the law has changed slightly in recent years; now, it seems you only need a license if you watch live television. In this context, on-demand or pre-recorded services do not count. So, if you only ever used, say, iPlayer then you do not need a license at all. You will have far less television to choose from, but by purchasing a Smart TV box for £40-£50 you can then forego the annual television license, which is currently £145.50. However, it might be prudent to take steps to prove you don't watch live television, such as unplugging your aerial or making sure the TV is not tuned in to any channels. It will be interesting to see how this pans out, as many people are predicting that one day all television will be on-demand.