I watch all my TV via the internet (damm living in a lited building in the middle of a conservation area, I can't put dishes or TV aerials up!)
2mb is the minimum, but I'd suggest at least 4Mbs for reliable watching, especially if somebody else wants to be browsing the internet on your connection while you are watching TV.
I can't think of any cast iron technical reason why SP3 would be required, but you may find the software won't install unless you have SP3 installed. but more importantly, if you do not have SP3 installed you really should have as it provides a lot of critical security updates for windows.