Netflix shares drop as Amazon unveils streaming service

Investors apparently didn't receive memo that online DVD rental leader has competition

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Online retail giant Amazon.com is ready to take on Netflix in the streaming video market.

(Also see: Resentment of Netflix by carriers, media companies grows)

Reuters reports that Amazon is offering its "prime" customers -- people who pay $79 annually to get free two-day shipping -- a selection of 5,000 movies and television episodes to stream via their computers.

This appears to be an incremental move by Amazon to test out demand for streaming services. Certainly rolling out a service just for Amazon's prime customers isn't a full-fledged assault on Netflix, yet shares of Netflix (NASDAQ: NFLX) fell as much as 13.42, or 5.7 percent, to 222.09 in early trading Tuesday before crawling back to 225.90, still more than 4 percent below Friday's close.

Are the investors surprised that Netflix is being challenged, even in a limited way -- by a major Internet player? Is this out of the blue? Because the last I read, Amazon, Google, Apple, Microsoft and cable TV providers all are eyeing the online streaming video market. This has been talked about for months.

Netflix currently has a subscriber base of 20 million, with most subscribers using its streaming service in lieu of DVDs mailed to their home, the longstanding backbone of Netflix's business model.

The number of Amazon "prime" customers is harder to come by. Fortunately, Quora, the increasingly popular "question and answer" service fueled by Silicon Valley egos, filled in the knowledge gap. In response to the question, "How many Amazon customers subscribe to Amazon Prime?" came this response:

"That number's not even revealed internally. 'A lot' is the answer."

You gotta love metrics.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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