Amazon Inks Deal with Epix

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

Epix is a premium cable channel with more than 15,000 titles jointly owned by Viacom Inc's ( VIAB - Analyst Report ) Paramount Pictures, Metro-Goldwyn-Mayer Pictures and Lions Gate Entertainment Corp. ( LGF - Analyst Report ) . It offers movies, classic titles, comedy, music and sports to viewers across the country.

The online retailer has been consistently upgrading and promoting movies and television shows on its streaming video service. Over the past 12 months, Amazon has entered into a number of deals with every major Hollywood studio, as well as some of the major cable networks. Last week, the company inked a deal with NBCUniversal, which took its total number of available videos to more than 22,000.

The latest deal with Epix will expand Amazon’s already-large selection of movies available to customers as part of their Prime membership. Amazon said that movies such as "The Avengers," "Iron Man 2" and "The Hunger Games" will now be available on Prime. The deal will add about 3,000 more movies to Amazon's video streaming library, making it a significant force in the video streaming segment and increasing competition for Netflix Inc ( NFLX - Analyst Report ) and Apple Inc ( AAPL - Analyst Report ) .

Netflix had signed a five year streaming deal with Epix and paid $200 million every year since 2010 for exclusive online rights to Epix movies. The deal expired at the end of August, requiring the company to either renegotiate the terms with Epix or allow the rights to be sold to other Internet video services. Since the announcement of Amazon’s deal with Epix, Netflix shares have dropped.

Though this deal is a big blow to Netflix, threatening its leadership in a growing market, Netflix’s Internet video library is estimated to have more than 60,000 titles, still far more than Amazon's service.

We believe that one of the key strategies for Prime Instant Video remains the expansion of its video archive. Amazon's vast offerings at discounted rates ($79 per year for Prime video 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’s additional advantage is a steady customer base, since Prime offers several other advantages (related to online shopping for example) compared to Netflix.

Amazon is one of the leading players in an extremely fast-growing market. In the second quarter, Amazon’s revenue of $12.83 billion was better than the guidance and in-line with consensus expectations. 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, Barnes & Noble, Inc. ( BKS - Snapshot Report ) and Google ( GOOG - Analyst Report ) remains strong.

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