Time for me to eat a little more crow...

http://bluray.highdefdigest.com/2313/lordringstrilogy.html

'The Fellowship of the Ring' is a peculiar piece, as it is sporadic, random, intermittently brilliant and tragic...and yes, we're still talking about the video, here. Detail is far from consistent, as from shot to shot in any scene, it's almost like watching the film from multiple grade sources culled together. There are moments were distance shots boast brilliant clarity and the finest of minute detail, then a close up will follow that's muddled beyond belief. While I cannot say what created this issue, I can say that DNR (yes, Digital Noise Reduction) played a large part. There are numerous excessively smoothed and muddy moments, and they're hardly difficult to spot.

Review says that the sequels are better but still have problems. From the review of ROTK:

DNR? Yes, it's still there, no matter how improved the picture looks, there is still the occasional smear and loss in detail. Motion can at times make it obvious, though close ups are often the most affected and notable victims. It became a game, really, watching hair and seeing if it gets smudged and blurred. And then, something occurred to me. Fans of the film can gather 'round this collection and have one hell of a drinking game: whenever someone notices DNR, take a shot. Alcohol poisoning is sure to ensue.