Like OP, I have used Netflix for some time and have seen an increase in bad, dirty, and damaged DVDs. Maybe a cost cutting move, not replacing as often. I have also received at least two(2) with copyright violation, that never would play.
I have also notice delivery time in a lot of cases seems to have increased 1 business day.
LOTR is a little behind in his analysis. NETFLIX instant play through X-box gold direct to TV will keep NetFlix alive. They just recently signed a deal to stream to PS3. Diversification is the answer; I thought Blockbuster would be out of business by now; but so far they have adapted.
Later,
Forest Man