Amazon Gives Netflix Another Reason to Worry (NAS: AMZN) keeps beefing up its streaming arsenal.

The leading online retailer has entered into a licensing agreement with MGM to add hundreds of classic movies and TV shows to the Prime Instant Video library that allows members of Amazon's Prime loyalty shopping program to stream more than 18,000 titles.

Yes, Netflix (NAS: NFLX) clearly has the larger and better catalog, but Amazon Prime is cheaper.

The e-tailer charges Prime subscribers $79 a year for the membership that includes free two-day delivery on Amazon-warehoused items, free monthly Kindle rentals, and more.

The new deal with Metro-Goldwyn-Mayer Studios will add hit movies including The Silence of the Lambs, Dances with Wolves, and The Terminator to the service later this year. Cult fave Stargate will be one of the television shows offered.

Amazon isn't standing still here. It was less than a month ago that the company struck a deal with Viacom's (NYS: VIA) Paramount.

For better or worse, Amazon is taking this initiative seriously. Investors know that Amazon is sacrificing near-term profitability for the sake of long-term market share. Margins continue to contract. Net sales may have soared 34% to $13.2 billion in its latest quarter, but it came at the expense of a 35% decline in earnings.

Taking a page out of Netflix's playbook, Amazon's Prime Instant Video library can be streamed through PS3 and Xbox 360 consoles. The streams are also available through smart televisions, PCs, and Kindle Fire tablets, but we all know that the final mile here is the living room. Consoles have tens of millions of Web-tethered users apiece, making it the perfect video streaming appliance.

For now, Amazon's presence hasn't slowed Netflix. The popular video service may be shedding DVD-based subscribers since last summer, but it's padding its count of customers paying $7.99 a month for unlimited streams.

Amazon doesn't mind giving this benefit away. Offering up 18,000 titles at no additional costs will make video buffs more familiar with its pay-per-view library that is now 120,000 titles wide.

Amazon knows what it's doing. Netflix better make sure that it also knows what Amazon is doing.

Gnaw something
Nine out of 10 of Amazon's best-selling items during the quarter were digital products. Clearly, the next trillion-dollar revolution will be in mobile, and Amazon isn't the only likely winner. A free special report will get you up to speed.

At the time thisarticle was published Longtime Fool contributor Rick Munarriz owns a first-generation Kindle and a Kindle Fire. He does not own shares in any of the stocks in this story, except for Netflix. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Motley Fool owns shares of Netflix and Fool newsletter serviceshave recommended buying shares of and Netflix. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.