Netflix (NASDAQ: NFLX) shares are down about -8% since Tuesday. Yes, that Netflix — the same video rental service that announced massive second quarter profits in July, the Netflix that is up over +130%  since January 1. So what happened?

In short, stock market analysts said that Netflix’s days are numbered and Wall Street agreed by selling off NFLX stock. More specifically, Morgan Keegan analyst Justin Patterson cut his Netflix rating to “under perform” and noted that the changing face of streaming video and the inability or unwillingness of NFLX to hike subscription fees has made 2010 highs unrealistic. “We believe shares no longer reflect fundamental changes in Netflix’s business model and that risks now significantly outweigh return,” wrote Patterson.

It’s tough to disagree with that. Meaning that most likely it’s time unload Netflix shares before the recent drops in NFLX stock only get worse.

Netflix shareholders likely will balk at Patterson’s analysis. After all, 2010 has been a stellar year for the Los Gatos, California company.  Since January, Netflix has gained 2.7 million new subscribers. To put this in perspective, that’s 800,000 more subscribers in just six months than Netflix gained in all of 2008 — and just shy of the 2.8 million new subscribers that signed up over all of 2009. A +34% jump in profits in the second quarter of 2010 is proof of this growth.

The user base and financials have been so healthy that Netflix has begun aggressively expanding its streaming video operations. In the past two years, Netflix has jumped from offering instant streaming on Microsoft (NASDAQ: MSFT) Windows-based computers and the Xbox 360 to Apple (NASDAQ: APPL) MacBooks iPhones and iPod Touch devices to the Sony (NASDAQ: SNE) Playstation 3 and  Nintendo (PINK: NTDOY) Wii video game consoles, and others.  The growth continues, as Netflix followed the announcement of massive second quarter earnings with news it would bring streaming services to Canada in the fall. That’s the first Netflix expansion outside the U.S., and if successful could literally open up a world of new profit opportunities.

As it has grown, Netflix has continued to forge new partnerships with premium content providers. The most recent of which is a new and purportedly expensive agreement to bring content from the Viacom (NYSE: VIA), MGM, and Lions Gate Entertainment (NYSE: LFG) joint venture EPIX to Netflix’s streaming service.

Here’s where we get to one of the problems with Netflix, and Patterson’s major concerns about the volatility of Netflix shares. For all of Netflix’s massive growth, it hasn’t adjusted its subscription model to accommodate for a massive new audience.

Netflix currently offers two subscription packages, an $8.99 per month package that allows subscribers to receive one DVD or Blu-ray through the mail at a time and a $13.99 per month option that lets them rent two at a time. Both packages offer unlimited access to all of Netflix’s streaming titles, including those from premium content providers like Starz Entertainment, Showtime and now EPIX. The simultaneous rapid growth of Netflix’s subscriber base and the growth of its streaming video service indicate Netflix users are accessing much more expensive content than when the business was predominantly based on DVD rentals through the mail – but without an accompanying increase in fees.

It is bewildering that Netflix hasn’t announced plans to readjust its subscription prices to reflect its changing business and it won’t be too long before they’re forced to. If they don’t, their content partners will seek greener pastures, which are popping up in abundance.

Netflix is no longer the only player in the streaming video market. Hulu, the streaming video joint venture between Fox network owner News Corp. (NASDAQ: NEWS), ABC’s Disney (NYSE: DIS) and General Electric (NYSE: GE) property NBC Universal has finally started to grow beyond its web portal. It launched a subscription service Hulu Plus at the end of June, letting subscribers stream Hulu content on Sony’s Playstation and through an app available on Apple’s iPhone 4, iPad, and iPod Touch. And tech heavyweight Google Inc. (NASDAQ: GOOG) is also working to launch Google TV software in set top boxes this fall, which would allow users to find easy, free alternatives to Netflix’s streaming content.

Netflix also faces the challenge of content providers abandoning ship to launch their own services. Time Warner (NYSE: TWX) property HBO, after continuously turning down deals to get their content on Netflix, is launching the streaming channel HBOGo later this year. That could be just the first of many content partners that go it alone.

Netflix refuses to change its pricing structure and shows no sign of raising prices before the year is out. That means that investors may want to think of pulling the plug now, while shares are still above $125 and still in the black from just a few months ago.

As more competitors enter the streaming video market, Netflix is in danger of not evolving to face its changing business. The company isn’t on the verge of bankruptcy like Blockbuster, but it certainly shares the same problem of costly content and a failure to adapt.

As of this writing, Anthony Agnello did not own a position in any of the stocks named here.

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