Final answer:
Netflix misjudged the elasticity of demand and the consumer preference for physical DVDs over streaming, despite an increase in substitute services such as Vudu, Amazon Prime, Hulu, and Redbox.
Step-by-step explanation:
Netflix's misestimate of customer departures was largely due to an increase in the variety of alternative services available, such as Vudu, Amazon Prime, Hulu, and Redbox, in addition to retail stores. Despite the convenience of online streaming, many people in 2012 continued to prefer the tangibility of a physical DVD over digital formats.
The convenience of Redbox kiosks, a mere five-minute drive for a significant portion of the population, coupled with an underestimated preference for physical media, contributed to this miscalculation. Netflix also made the mistake of misjudging the elasticity of demand for their services, assuming customers would not as readily switch to other options.