They were just too ambitious is all. Hastings knows that streaming is the future, and he went into startup mode to try to turn his ship in that direction. The two problems are customer expectations and movies studios demands.
Customer expectations are a bitch because people believe $10 is the right price for Netflix and $16 is outrageous, even though this is a fraction of the cost of all traditional options. Now that expectations are set, price hikes just enrage people. But for a good selection of streaming content, people are going to have to be enraged for a while. We already saw what happened to Hulu. The reality is that studios are not going to let their revenues be decimated just so that we can live in our utopian future of streaming anything we want for $10/month. That is such a kick in their gut that they will be willing to spend the money to all build their own shitty services that fail over the next 4-5 years, put up with rampant piracy, and take any number of viewer-hostile actions all to avoid accepting Netflix's vision. Eventually I believe the market will cut them down to size, but getting everything you want is going to cost more than $10/month.
I give Reed Hastings a lot of credit for trying to bring the future faster by focusing on streaming, but he overplayed his hand. Netflix's clout comes from its user base size and the fact that it's DVD business is unassailable by big media. They're not going to be able to throw their weight around on streaming deals, and studios will be dragging their feet anyway. The smart thing to do is to focus on streaming and always be aware that it's the future, but keep DVDs as a value anchor so customers can justify the mediocre streaming selection.