We've been cable-free for several years now, and yes it's all thanks to the internet!
We're in Canada, so the avenues we have to use are probably a bit different than yours. Hulu doesn't stream in Canada, for instance. But, we go to watch.ctv.ca for most of our "regular" current shows (Castle, So You Think You Can Dance, Big Bang Theory), watch.thecomedynetwork.ca for, well, the comedies (Daily Show, Colbert Report, South Park), and watch.discoverychannel.ca for the science-y reality show stuff (Canada's Worst Driver, Cash Cab, Dirty Jobs).
We actually get CTV on our aerial (it's the only station that comes in decent), but we usually prefer to watch online anyway because of a HUGE pro that you didn't even mention! FEWER COMMERCIALS!!!! The commercials on the network online streaming sites are like 10 seconds and only ONE per commercial break.
So the only shows we usually watch 'live' on TV are things that really matter if they're live, like So You Think You Can Dance Canada so we can vote.
Otherwise, we just wait until the day after initial broadcast and we can watch when we want, almost commercial-free, with pause and rewind etc
And we can watch several episodes in a row if we feel like it.
Also, we just got Netflix in Canada a few weeks ago. I'm actually surprised how many current TV shows it has! Obviously not this current season, but lots of past seasons. And there's lots more coming, the selection is relatively limited right now. But they have Mad Men, for an example of a current show. And also LOTS of older shows, including a HUGE selection of British TV (which we looove.... Blackadder and Doctor Who and Fawlty Towers) and MST3K and I'm currently re-watching all the old episodes of Greatest American Hero... And it's only $8/month!
So far we haven't done anything like downloading shows from itunes. I didn't even realize that possibility existed, in fact. We've been fine with our free sources and Netflix. But maybe if something came up that we really wanted to see but it wasn't available otherwise, that would be an option we'd look into.