I didn't want to be right.

Shares of Netflix (Nasdaq: NFLX) are getting smacked around, despite delivering another blowout quarter last night.

The pinprick to investor enthusiasm's balloon comes in the form of declining average revenue per subscriber, a worrisome metric that I highlighted three months ago.

Singled out as "the one thing that Netflix is doing wrong," I pointed out the problematic significance of Netflix's subscriber count soaring 35% over the past year, while revenue growth was only climbing 25% higher. Are current subscribers trading down to the cheapest unlimited plan at $8.99 a month, getting by with just one disc out at a time as long as they have access to the streaming smorgasbord? Are new members being wooed by the $8.99 monthly buffet -- and resisting the upsell of higher-priced plans that provide more DVDs or Blu-ray discs?

"Streaming has been Netflix's not-so-secret weapon in this fight, but it might also catch the company in friendly fire," I wrote at the time.

Well, the battlefield rift is widening. Netflix has now topped the 15 million subscriber mark -- 42% ahead of where it was a year ago -- but revenue climbed by a slightly softer than expected 27%.

As my top line gently weeps
The disparity will continue, and it shows in the company's refreshed guidance since its previous outlook from April. At the high end of its new projected ranges for all of 2010, Netflix is bumping its subscriber target 7% higher and its earnings outlook is getting a 9% kick upstairs. Its top-line guidance is flat where it was three months ago.

I was right -- but in the mother of all Hollywood plot twists -- I was also dead wrong.

The top line doesn't matter. Not for Netflix. Not right now. This isn't the game that the company is playing, and as long as the subscribers keep coming and margins keep holding up their end of the bargain, investors shouldn't care.

I didn't get it three months ago, as I was waving warning flags as the stock soared 15% higher the day after its first-quarter report. Color me a contrarian again this time around, as I call out Mr. Market for overreacting to a metric that doesn't matter.

Netflix is quietly amassing an army of couch potatoes. It's the only company that gets it. Apple (Nasdaq: AAPL) and Amazon.com (Nasdaq: AMZN) have been serving up piecemeal digital rentals for years, but they're not moving the needle. Coinstar (Nasdaq: CSTR) will be one to watch, as its Redbox unit unveils its digital strategy later this year.

Let's take it from the bottom
For now, Netflix stands alone. It's doing right by its subscribers, with churn down dramatically over the past year. Subscriber acquisition costs clocked in higher -- an ugly sight given the dip in average revenue per subscriber -- but time will tell if that's an anomaly or a trend worth losing sleep over. File that blinking amber sign away, and let's revisit the metric come October.

Netflix is doing it right because it's not in denial.

CEO Reed Hastings gets it because he knows that the optical disc is dying. Higher postal rates and inventory logistics of physical rentals will be moot, as more consumers embrace web-served flickery. It's not a shock that Netflix's Canadian service that will launch in the fall will only be a streaming service.

A month ago, I got a nudge from the company's corporate communications department when I referred to Netflix as a DVD rental company. I was asked if I can update my descriptor in the future to something along the lines of an "online movie subscription service." See, even Netflix thinks DVD is a dated initialism. 

Under this kind of scenario, can you blame Netflix for placing more emphasis on growing its subscriber base and its digital catalog? Why tworry about getting subscribers to pay more for the fading rental medium of optical discs? Any shrewd investor would follow the margins before following the top line, and Netflix's performance in recent quarters shows it can make more money with people paying less as long as it makes it up in volume.

After all, if Netflix really thought this was a problem, it could easily rectify the trend. Raising prices for its lowest plan or hiking up the plan requirement for unlimited streaming to its original $16.99 a month offering that provides three DVDs out at the same time should do the trick. However, Netflix would lose some movie buffs in the move, and we all know this is not what the company wants to do even if it appears to be simply in an uncontested arms race.

Netflix has a million more subscribers now than it had three months ago -- and that's a million more that any potential Netflix killer will have to swipe away in the future.

So get excited about Netflix's content-delivery partners Akamai (Nasdaq: AKAM) and Limelight (Nasdaq: LLNW) as more and more subscribers take Netflix up on its streaming. Bet against distribution centers, disc duplicators, or whoever prints out the company's signature red mailers.

Netflix is several quarters away from today's bears. It's the better vantage point and a killer view.

Will Netflix ever stop growing? Will international expansion save the day? Share your thoughts in the comment box below.

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