3rd UPDATE: Amazon To Stream Video In Challenge To Netflix

Amazon.com Inc. (AMZN) launched Tuesday an unlimited streaming-video service, bolstering its position in the fast-moving online video space and putting it in direct competition with Netflix Inc. (NFLX)

Netflix later announced a new streaming content deal with CBS Corp. (CBS), further accentuating how quickly media giants and Internet companies are scrambling to adjust to new technologies that enable consumers to watch steaming video directly from the Internet. The shift is a particular challenge to Amazon's sales of movie and TV show DVDs.

Amazon said it would make 5,000 movies and TV shows available for unlimited online streaming to U.S. members of its existing Amazon Prime offering, which costs $79 per year and includes free two-day shipping and reduced one-day shipping rates on items purchased on its website. The new subscription service allows access to mostly older movies and shows from a variety of studios.

The price of Amazon Prime undercuts the price Netflix's streaming service by about $17 per year, even before factoring in the shipping values included. Netflix, however, has a head start with the breadth of its content offering--a point highlighted by its latest two-year deal with CBS, which provides access to older, select shows and movies from the media company's content library, such as full seasons of classic shows like "Frasier," "Family Ties" and "Cheers."

A person familiar with the new agreement said Netflix will pay CBS hundreds of millions of dollars over the two-year agreement, and CBS has options to extend the deal by up to two years and add more content in return for higher payments.

Netflix also has an edge in subscribers, which the company recently said now exceed 20 million. Amazon, by contrast, is believed to have about 5 million Prime users in the U.S, according to Piper Jaffray analyst Gene Munster.

"This is just a starting point for us," said Cameron Janes, director of Amazon's instant video service. "We expect to grow the category over time."

Amazon's move comes as the Seattle company continues to invest heavily in infrastructure and technology to expand its business, investments that are squeezing the retailer's bottom line and have disappointed investors. Meanwhile, Netflix's pricey content deals are a bitter reminder to Amazon shareholders how costly online video competition could become.

"Investors will likely be concerned that this is just the beginning in terms of content costs," said Macquarie Capital analyst Ben Schachter.

Janes declined to comment on Amazon's prospects for competing with Netflix, saying the company is focused on providing its customers with a quality online video experience.

The majority of the major studio content offered in Amazon's new streaming service is library content that is five to seven years old, Janes said. Movies like "Syriana" and "March of the Penguins" are available from Time Warner Inc.'s (TWX) Warner Bros., while films like "Charlie's Angels" and "Stripes" are available from Sony Entertainment. It also has relationships with independent studios, like Music Box Films, which provides access to "The Girl With The Dragon Tattoo" film trilogy.

Amazon also has a separate a la carte service that offers access to 90,000 film and TV shows, including more current fare.

Shares of Amazon recently slid 3.4% to $180.13. Netflix shares fell 5.8% to $221.70.

Los Gatos, Calif.-based Netflix offers its streaming video service for $7.99 per month, providing access to some content just months after its DVD-release through deals with premium movie networks Starz Entertainment and Epix LLC.

Netflix's success also demonstrates the appeal of older library content from studios that makes up the bulk of its streaming service. Its success has raised concern in the industry that such low-cost movie services are weighing down the value of content at a time when online piracy is also damaging the business.

Some analysts believe that online video services will encourage consumers to go without a traditional pay-TV subscription, which provides a key revenue stream for major entertainment conglomerates.

Munster argued in a note that Netflix's aggressive push to partner with dozens of device makers--a push that has enabled users to easily watch streaming content on their TVs--has given the Los Gatos, Calif.-based company a significant lead in Internet-delivered entertainment. These devices include TVs, game consoles like Microsoft Corp.'s (MSFT) Xbox, Blu-ray units and streaming players like TiVo Inc.'s (TIVO) digital video recorders. Netflix content can also be streamed to mobile devices like Apple Inc.'s (AAPL) iPad and iPhone.

He forecast that there will be about 94 million Netflix-enabled, TV-connected devices in the market by the end of 2011, compared with about 21 million Amazon-enabled, TV-connected devices.

Amazon has also delved into publishing e-books through its Digital Text system, which allows writers to upload and sell manuscripts without professional editing that can be read on its Kindle e-reader.

Last month, Amazon reported its fourth-quarter earnings rose 8.3%, better than expected, as revenue jumped 36%, although the growth fell short of Wall Street's estimates.

-By Nat Worden, Dow Jones Newswires; 212-416-2472; nat.worden@dowjones.com

-By Scott Morrison, Dow Jones Newswires; 415-765-6118; scott.morrison@dowjones.com

--John Kell contributed to this article.

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