Netflix reported its Q3 '12 results yesterday, including dismal streaming growth of just 1.2 million subscribers in the critical U.S. market. But the big takeaway for me continues to be the breathtaking contraction of its highly profitable DVD-by-mail segment. By my calculations, beginning in Q3 '11 (when the Qwikster debacle was launched) through Netflix's forecast for Q4 '12, the company will have lost approximately 8 million DVD subscribers, or about half the estimated 15.9 million it had back on July 1, 2011.

Can you think of any other company that has pursued a voluntary strategy shift away from a reasonably healthy core business, which then resulted in half of its customers dropping in the subsequent 18 months? I cannot. In fact, I wonder if there's ever been one. That's how remarkably bad the Qwikster decision is turning out to be.

In Q3 '12, Netflix lost another 630K DVD subscribers to end the quarter with just over 8.6 million. The company said over two-thirds of these are "hybrids," also subscribing to streaming. So assuming this is about 5.9 million, then Netflix lost about 800K hybrids in the quarter. Hybrids were a group Netflix particularly targeted with its Qwikster-related pricing plans; instead of offering inducements to keep highly profitable hybrids, they got nailed with double-digit rate increases. No surprise many have fled, even as DVD-only subscribers have held steady or actually bumped up, as they did in Q3, to 2.7 million.

DVD subscribers are still crucial to Netflix, because even in their diminished numbers, they still contributed $131 million of profit in Q3, compared to just $91 million for domestic streaming. They're also 3 times more profitable than streaming, with a 48.2% contribution margin to streaming's 16.4%. With international streaming racking up a $92 million loss in Q3 (bringing its 5 quarter total to $367 million), DVDs are playing a crucial role in funding Netflix's overseas expansion. Clearly, if DVDs hadn't been crippled, Netflix would be on a better financial footing with international (and investors would feel a whole lot better about international's losses).

Meanwhile, Netflix's bet on streaming is also looking more underwhelming than ever. Q3's addition of 1.2 million domestic subscribers was at the low end of the 1.0-1.8 million guidance it shared just 3 months ago. Worse is that its revised full year 2012 guidance of 4.7-5.4 million domestic subscriber additions is a reduction from the 7 million the company said it would add just 6 months ago. Asked what accounted for the gigantic miss, CEO Reed Hastings simply said we're "feeling our way along as the streaming market grows" and that they had made a "forecasting error." I'll say.

The best case scenario is now 25% domestic subscriber lift for 2012, an amazing deceleration vs. the heady days of 2010 and first half of 2011 when Netflix was adding 2 or 3 million subscribers per quarter. That reflects how much more competitive the video landscape has become for Netflix. While it highlighted Hulu as its closest competitor, that's just one of the many options consumers now have: Amazon is closing the content gap vs. Netflix and underpricing it, Redbox is offering cheap DVD rentals and gearing up, with Verizon, for an SVOD launch in Q4, TV Everywhere initiatives are proliferating, HBO GO is driving more value for its subscribers, and the list goes on.

In this context, it is no surprise that Netflix's streaming growth is slowing. Throw on top of that rising content licensing costs and an expensive international expansion, and Netflix's future remains very cloudy.