The partnership, which allows Amazon to offer consumers access to TV shows from channels like MTV and Comedy Central through its Prime Instant Video Service, brings the company's streaming titles to around 15,000.
While video streaming is currently offered for free as part of Amazon's two-day shipping service Prime, the company is reportedly considering carving out the operation as a standalone, subscription-based business, which industry analysts and investment professionals say could post a direct threat to Netflix.
"This is a potentially a staggering event with respect to Netflix -- a huge negative," said Needham analyst Charlie Wolf. "Amazon is finally getting serious about offering a competitive streaming service and it's a signal the company is prepared to spend an amount that would make the service rival Netflix."
Amazon has already started to invest heavily in content, striking deals with networks and studios including CBS (Stock Quote: CBS), News Corp's (Stock Quote: NWSA) Fox, Disney (Stock Quote: DIS) and Warner Bros.
Amazon's aggressive investments may be part of a larger plan to beef up its content library for use with its Kindle Fire device. The company has priced the tablet cheaply with hopes of recouping costs through the sale of digital content.
Amazon could induce customers to give its service a shot by pricing it at $5.99 per month and giving a three-month free trial to those who purchase the Kindle Fire, said Justin Colatosti, an analyst with Dawson James Securities. Netflix costs $7.99 per month for unlimited streaming.
"Amazon has a lot of unique synergies with streaming," said Colatosti.
A number of other companies besides Amazon are also weighing Web streaming services that could lead to competition with Netflix down the line.
Verizon (Stock Quote: VZ) this week announced a deal with Coinstar's (Stock Quote: CSTR) Redbox unit, which would allow consumers to rent physical DVDs and stream movies through the Internet.
Google (Stock Quote: GOOG) is also reportedly looking to bolster its YouTube streaming services.
"It's not a winner-take-all market," said Tony Wible, an analyst with Janney Montgomery Scott. "You'll have some people who are OK with Hulu and others with HBO Go, others with Amazon and you'll even see more players coming into the market."
Netflix is facing threats after rebounding from a nightmarish 2011, in which it lost over 800,000 customers. Shares plunged 75% after the company announced a price hike and the separation of its DVD and streaming services last summer.
Shares have since soared more than 80% since the beginning of the year, but some still aren't convinced.
"Competition is growing more than ever now--more so than when Netflix started falling apart last year," said Yoni Jacobs, a portfolio manager with Chart Prophet Capital. "There's been a short term bounce in the stock but it's not going to retake previous highs."
Shares of Amazon rose 0.9% to $185.88 in afternoon trading, while Netflix's stock dropped 2.8% to $124.28.
If you're considering switching from the popular movie rental service, you have plenty of options. Check out MainStreet's look at the best Netflix alternatives for more!