In This Corner, Netflix. In the Other Corner. . .Amazon?

The hunter becomes the hunted -- it's a plot twist that has been repeated in countless movies.

So it's only fitting that Netflix (NFLX), whose DVD-by-mail service and no-late-fee policy helped hasten the demise of several video rental chains, may soon find itself in a similar predicament. Amazon (AMZN), the world's largest online retailer, appears to be on the verge of augmenting its video-on-demand service with an unlimited movie and TV show streaming service that would compete directly with Netflix.

Amazon last weekend temporarily offered an option on its website that gave Amazon Prime customers unlimited streaming of about 5,000 movies and TV shows, DailyFinance sister site Engadget reported. Amazon Prime membership, which already includes a variety free, fast shipping deals on purchases made by members, costs $79 a year -- less than Netflix's unlimited streaming subscription plan, which runs about $96 a year.

Serving Notice to Netflix

Granted, Amazon's title selection would be only about a quarter of the approximately 20,000 titles Netflix offers, and it wouldn't include a high-resolution option, according to Engadget. Additionally, the content would come mostly from independent film companies as well as from the BBC and PBS.

Still, by offering the streaming service, Amazon could ease into the market, serving notice to Netflix that it may face additional competition over the next few years as some of its exclusive content agreements with companies such as Starz, Epix and, eventually, all of the major studios, expire, according to BTIG Research analyst Richard Greenfield.

"While Amazon's appetite for fresher, more expensive content is unclear, they clearly have interest in deep catalog content," wrote Greenfield in a blog post earlier this week. "While Amazon might have interest in sub-licensing content near-term to bulk up its content offering, longer-term, we suspect they could have interest in eliminating the 'middle-man' for content and seek to acquire pay window rights directly from the studios."

Disks Decline, Streaming Surges

Amazon, whose representatives didn't respond to a request for comment about the new service, would be looking to benefit from the growing trend of watching movies on laptop and tablet computers, and the widening user base of network-enabled TVs. And with $9 billion in cash on hand and a $77 billion market cap -- seven times that of Netflix -- Amazon is well positioned to invest in broader digital content delivery.

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Americans spent $2.5 billion renting digitally delivered movie titles last year, compared to less than $1 billion in 2005, Los Angeles-based Digital Entertainment Group reported last month. Over the same period, rentals of packaged media such as DVDs and Blu-ray disks fell to about $16 billion from $19 billion.

The Consumer Electronics Association forecasts that about 18% of the approximately 30 million high-definition TVs shipped to U.S. dealers this year will have Web connectivity, up from just 4% in 2009.

Such trends have already benefited Netflix, which has aggressively pushed its "Watch Now" streaming service over the past couple of years, and whose stock price has periodically spiked on rumors of a possible buyout by Amazon. Netflix said last week that fourth-quarter earnings surged 52% from a year earlier as its video-subscription service surpassed 20 million customers. About a third of its new subscribers are choosing a streaming-only plan.

Buying Out LOVEFiLM

Finding itself in the position of established market leader fighting off an aggressive new competitor would be something of a role reversal for Netflix. Founded in 1997, the company lured customers from video rental leaders Blockbuster and Movie Gallery by pitching its "no late fees" policy and the convenience of its DVD-by-mail service. Movie Gallery and its Hollywood Video stores closed their doors last year, while Blockbuster declared bankruptcy in September.

Amazon recently said that it would acquire the 58% of European home-video distributor LOVEFiLM that it didn't already own. The price wasn't disclosed, but Reuters pegged it at about $200 million. LOVEFiLM, which was founded in 2004 and sold its first download-to-own movie two years later, currently has nearly 1.6 million members in the U.K., Germany, Sweden, Denmark and Norway.

Analysts have pointed to the company as a potential digital distribution partner for Coinstar's (CSTR) Redbox movie-rental kiosk operations. Redbox has said it would unveil its digital-distribution strategy this year, though it hasn't disclosed further details.

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