02/23/2011 11:23 am ET Updated May 25, 2011

Netflix Is Under Attack...Big Time

Nearly everyone dubbed Amazon's newly available streaming service a "Netflix-killer." The game may not be over, but they are under attack and here's why.

Let me introduce you to a little company called Wal-Mart. For years, Wal-Mart has drawn you in with their cheap new release DVDs. In fact, companies like Wal-Mart and Best Buy lose $2-4 on every single newly released DVD sold. This tactic drives you into their doors and gets you to spend money on other products.

Imagine though, instead of getting you to just come into the store, Wal-Mart could also get you to stick around to watch Amadeus for two and a half hours. This is what Amazon just built. They've created a way to get their most active users (Prime subscribers) to spend even more time on their site by freely giving away content. This will likely lead them to explore and purchase more products.

Netflix makes money by selling subscriptions to customers for more than they license the content from content holders. This is their sole revenue source and it's under attack.

Amazon on the other hand can use instant streaming as a loss leader. It not only gets people to spend more time on their site, but also to sign-up for Amazon Prime -- which has shown to drive 2-3x more purchases than the average Amazon shopper .

Before today -- the conversation was about Netflix killing Hulu. The conversation has become: will Amazon kill Netflix? Right now, they don't have enough high quality content to compete with Netflix. Their library only has 5,000 movie and television titles, as compared to Netflix's 20,000. It is also made up of older library titles like Amadeus, Analyze This, and Syriana. But, this is only the beginning.

Over the next year, Netflix has to renegotiate a content agreement with Starz to get access to films by Sony and Disney. To date, they've been successful closing deals with Epix (Paramount, MGM, Lionsgate), Relativity, and with major studios for back-catalog content. Going forward it will not be as easy. While Netflix needs the content to sell subscriptions, Amazon doesn't. They can overpay because they can make it back in other ways.

Amazon has already shown that they are willing to spend to get into this market. At the end of January, Amazon acquired LoveFilm, the Netflix of Europe, for $320MM. They already have the infrastructure to support the high bandwidth necessary to stream lots of content. And through their Unbox service, they already have relationships with studio digital distribution groups.

Netflix may not be dead yet, but Amazon did fire a warning shot. The second blow comes when Amazon starts serving the same high-quality content as Netflix. And the final nail in the coffin -- when there is content exclusively available on Amazon and nowhere else.