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Amazon.com Inc. (AMZN - Analyst Report) announced a three-year agreement with Paramount Pictures, extending its archive of films in its streaming video site, Amazon Prime Instant Video.

The online retailer has been consistently upgrading and promoting movies and television shows on their streaming video service. In June last year, Amazon signed a deal with CBS (CBS - Analyst Report) for broadcasting some of their classics. This was followed by Fox in September, and by Disney (DIS - Analyst Report) a few months later. In February this year, Amazon signed a deal with Viacom (VIAB - Analyst Report), taking the number of videos to a total of 15,000.

The latest deal with Paramount Studios will expand Amazon’s already-large selection of movies and TV episodes available to customers as part of their Prime membership. The Prime membership subscription comes at a cost of $79 per year.

The users can now view more than 17,000 movies and TV episodes on computers and digitally connected devices. However, Amazon has yet to match Netflix Inc. (NFLX - Analyst Report), its competitor in this space whose online viewing library comprises 60,000 titles.

We believe that one of the key strategies for Prime Instant Video should be the expansion of its video archive. Netflix has seen the benefits of this action in recent times, in spite of its instituting rate increases. However, Amazon's vast offerings at discounted rates ($79 per year Prime shipping service versus Netflix charges of $95 per year for its streaming video service) could create a price war in the digital delivery of movies.

Amazon is one of the leading players in an extremely fast-growing market. In the first quarter 2012 earnings announcement made on April 25, Amazon’s North America Media business declined by 14.2% sequentially; which was lower-than-expected, thus indicating that the Media segment remains one of the strongest contributors to growth.

Management attributed the increase in revenue to the growing consumption of digital content across different categories because of the advantageous value proposition Amazon was able to provide to its customers.

However, competition from eBay Inc. (EBAY - Analyst Report), Apple Inc (AAPL - Analyst Report) through its iBooks app, Barnes & Noble, Inc. (BKS - Snapshot Report) and Google remains strong.

Currently, Amazon has a Zacks #3 Rank, which implies a Hold rating in the near term.

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