Reed Hastings was soaking in a hot tub with a friend last month when he shared a secret: his company, Netflix , was about to announce a plan to divide its movie rental service into two — one offering streaming movies over the Internet, the other offering old-fashioned DVDs in the mail. 
 
 “That is awful,” the friend, who was also a Netflix subscriber, told him under a starry sky in the Bay Area, according to Mr. Hastings. “I don’t want to deal with two accounts.” 
 
 Mr. Hastings ignored the warning, believing that chief executives should generally discount what their friends say. 
 
 He has since regretted it. Subscribers revolted and many dropped the service. The plan further tarnished a once widely respected Internet service that had already been wounded by an unpopular price increase in the summer. Mr. Hastings was forced to reverse the planned split — but not the price increase — three weeks later and apologized. 
 
 On Monday, the company revealed the damage that had been done. It told investors that it ended the third quarter of the year with 800,000 fewer subscribers in the United States than in the previous quarter, its first decline in years. The stock plummeted more than 25 percent in after-hours trading. [In regular trading Tuesday, the stock fell more than 30 percent.] 
 
 Despite the decline in subscribers, the company did well financially in the quarter. It reported net income of $62.5 million, or $1.16, a share, compared with $38 million, or 70 cents a share, in the year-earlier quarter. Revenue rose 49 percent to $822 million. Both revenue and income topped analysts’ expectations. 
 
 Like many other companies built in Silicon Valley, Netflix prides itself on its analytical, data-driven approach to making decisions. But it made a classic business misstep. In its reliance on data and long-term strategy, the company underestimated the unquantifiable emotions of subscribers who still want those little red envelopes, even if they forget to ever watch the DVDs inside. 
 
 Mr. Hastings said in an interview last week, his most detailed discussion yet of the bruising period, that he had been guilty of overconfidence and of “moving too quickly.” But he said he still believed — as do nearly all investors and analysts — that Netflix’s future lay not in DVDs but in streaming over the Internet. “We still need to move quickly in streaming,” he said. 
 
 Twice in the interview, Mr. Hastings linked the hostility toward Netflix’s price change and proposed breakup to the angry mood of the country, even citing the Tea Party and the Occupy Wall Street movement by name. 
 
 He said — and repeated it on a conference call for investors on Monday evening — that subscribers had been bothered more by the summer price shock than by the breakup plan. Until September, a combination of video streams and DVDs cost as little as $10 a month; now, that same package costs $16. “We are done with pricing changes,” Netflix said Monday in a letter to shareholders. 
 
 Mr. Hastings said he was not sure whether the plan to split the company had been presented to customer focus groups before it was made public. Mr. Hastings said he assumed it had been. But he said he did not recall what those focus groups had said about the plan. 
 
 He said Netflix was now trying to slow its decision-making to ensure that there was more room for debate about major changes at the company. 
 
 How Netflix came to be so out of touch with its customers is a cautionary tale for other companies that try to transform to new media from old. As the company’s streaming Internet service caught on with consumers, subscriber numbers soared and, with them, the company’s stock, rising ninefold from the start of 2009 to peak above $300 in July. 
 
 Last year, Fortune magazine put Mr. Hastings, 51, on its cover as the businessperson of the year after he seemed to pull off the rare feat of finessing the “innovator’s dilemma” by navigating Netflix to the digital future from its DVD rental business. 
 
 A key to its success was the way it blended its new and legacy businesses. While the library of material available for streaming was relatively sparse because of Hollywood licensing restrictions, Netflix customers could find many of those missing movies, especially new releases, in the company’s far larger DVD selection. 
 
 But Netflix needed to spend more money to license additional material for its streaming service. Collecting $10 a month from subscribers was insufficient as costs ballooned. Mr. Hastings defended the increase last week and again on Monday, but he said it was “too big a price change all at once.” Hubris played a big role in the errors, he said. ||||| Oct. 25 (Bloomberg) -- Netflix Inc. dropped the most in seven years after the video-rental service said it lost 800,000 U.S. subscribers in the third quarter, more than expected, and predicted more cancellations over a price increase. 
 
 Netflix plunged 37 percent to $75.28 at 9:39 a.m. New York time, for the biggest intraday decline since October 2004. The stock closed at an all-time high of $298.73 on July 13, according to Bloomberg data. 
 
 The outlook suggests Netflix has been unable to contain a subscriber revolt over a price increase and aborted plan to force subscribers into separate streaming and DVD services. The company now forecasts losses in 2012 because of costs to offer content in the U.K. and Ireland, and will delay further expansion until profitability is restored. 
 
 “Pausing is a good thing from an investor standpoint,” Chief Executive Officer Reed Hasting said in an interview. “We are going to pause and restore our global profitability.” 
 
 Hastings, responding to questions, said he has no plans to step down and declined to comment on discussions with Netflix directors. 
 
 Domestic subscribers fell to 23.8 million as of Sept. 30 from 24.6 million three months earlier, a bigger decline than the company projected in September, according to a website statement yesterday. This quarter, U.S. customers will fall short of the 24.9 million analysts were predicting. 
 
 Subscriber Fallout 
 
 Investors are trying to gauge the extent of the fallout from the price increase and aborted plan to put DVD customers on a new service called Qwikster. 
 
 “To show even modest U.S. subscriber growth in the fourth quarter will require significant ramp-up in Netflix's marketing spending,” said Paul T. Sweeney, director of research for Bloomberg Industries. 
 
 Hastings downplayed the likelihood of a big increase in marketing efforts. 
 
 “Our streaming marketing has been very effective in the past two years,” Hastings said. “We are going to work on improving the user interface, expanding to more platforms and delivering more content. There's no grand gestures, there's just a lot of steady and intense efforts.” 
 
 Domestic streaming subscriptions are forecast to decline this month, level off in November and rebound in December to end at 20 million to 21.5 million, Netflix said. DVD subscriptions will fall “sharply” to 10.3 million to 11.3 million customers. 
 
 Fourth-Quarter Outlook 
 
 Fourth-quarter profit will be $19 million to $37 million, or 36 cents to 70 cents a share, on revenue of as much as $875 million, the company said. Analysts were projecting profit of $1.10 a share on sales of $919 million, according to Bloomberg data. The company earned $47.1 million, or 87 cents a share, on sales of $595.9 million, a year earlier. 
 
 Domestic subscriber growth is particularly important because Netflix has used its wide lead over U.S. rivals to finance growth in its streaming business and expand overseas. 
 
 Netflix had projected a loss of 600,000 users on Sept. 15 to end the third quarter at 24 million. The actual results were in line with the average loss of 780,000 customers seen by 10 analysts in a Bloomberg survey. 
 
 Domestic churn, a measure of subscriber turnover, jumped to 6.3 percent in the third quarter from 4.2 percent in the prior three months. The company's total subscriber count, including service in Canada and Latin America, fell to 25.3 million from 25.6 million 
 
 For the third quarter, Netflix reported net income rose 65 percent to $62.5 million, or $1.16 a share. Analysts projected 95 cents, the average of 25 estimates. Sales rose 49 percent to $821.8 million, beating expectations of $812.8 million. 
 
 --Editors: Rob Golum, Anthony Palazzo
– Apple isn't the only one who has hit a rough patch—Beleaguered Netflix is also taking a drubbing after posting a 91% drop in net income for the second quarter. Shares responded by dropping almost 15% in after-hours trading yesterday. The company’s decision to separate its DVD-by-mail service from its streaming service, thus increasing the subscription fee for customers who want both, ended up costing it 850,000 DVD-only subscribers in the second quarter in the US. Meanwhile, more than half a million US streaming subscribers came on board. "Their subscriber gains just weren't impressive," an analyst tells the Wall Street Journal. Though Netflix was once again profitable, with a net income of $6.2 million after losing $4.6 million in the first quarter, a letter to shareholders warns that a number of challenges are ahead—including a return to the red in the fourth quarter. And more bad news: HBO quickly squashed the idea of a partnership that would allow Netflix customers to stream the network’s shows. Netflix CEO Reed Hastings had raised the idea of a partnership in the letter to shareholders, but HBO says no deal is in the works, Reuters reports.