Amazon Inc and Hollywood studio partnership Epix struck a three-year deal that adds about 3,000 movies to Amazon's video streaming library, ramping up competition with the likes of Netflix Inc and Apple Inc.
The news pushed Netflix shares down as much as 11 percent and comes two days before Amazon is expected to unveil at least one new tablet computer at an event near Los Angeles.
The agreement gives Amazon Prime Instant Video subscribers access to such movies as "The Avengers," "Iron Man 2" and "The Hunger Games" from Epix's Hollywood studio owners and partners.
The Epix deal adds "thousands" of videos, said an Amazon spokeswoman, who declined to comment further. About a week ago, Amazon said its Prime Instant Video service had more than 22,000 titles to stream. On Tuesday, the company said the Epix deal brought that number to more than 25,000.
Amazon is expected to launch at least one new version of its Kindle Fire tablet on Thursday. Lining up easy access to content such as movies for tablet users is part of Amazon's strategy.
"Content is king - and Fire's killer app," said Colin Sebastian, an analyst at R.W. Baird. "We expect new devices to provide further integration with Amazon's digital content platform and cloud infrastructure, with movies, books and music."
Netflix has been paying $200 million a year since 2010 for exclusive rights to Epix movies. The exclusivity expires this month, but Netflix will keep Epix movies on its service through September 2013. Netflix has the option to extend its non-exclusive use of Epix through September 2014.
Netflix shares fell 6.3 percent to close at $55.93 on Nasdaq. The stock had dropped as low as $53.13 earlier in the day, down 11 percent from its Friday close.
"It gives Amazon Prime members a lot less reason to also have a Netflix subscription," R. J. Hottovy, an analyst with Morningstar, said of the Amazon-Epix deal.
Epix is a pay TV movie channel with more than 15,000 titles jointly owned by Viacom Inc's Paramount Pictures, Metro-Goldwyn-Mayer Pictures, and Lions Gate Entertainment Corp.
Founded in October 2009, the network is available through distribution partners like Verizon FIOS, Dish, and Cox Cable though it does not have agreements in place with larger operators like Comcast Corp and Time Warner Cable or with satellite service DirecTV.
Epix expects to make deals with other online players, CEO Mark Greenberg said in an interview. The company is talking with several companies including Apple Inc, Google Inc, Hulu and "about every single person in the digital space" about ways they could use Epix movies, he said.
"There are no deals to be done imminently, but there will be some done down the road," Greenberg said.
In July, Netflix CEO Reed Hastings said he "wouldn't expect (Netflix) to be affected significantly" by Epix movies appearing on competing services.
"Epix is not a particularly large source of total viewing. Much more of our viewing is on our exclusives" such as TV shows "Mad Men" and "Breaking Bad," Hastings said during his quarterly conference call with analysts.
Epix accounts for about 5 percent of viewing hours on Netflix, company spokesman Joris Evers said.
Netflix shares may be weak because Amazon's deal with Epix makes an acquisition of Netflix by the world's largest Internet retailer less likely, according to Tony Wible, an analyst at Janney Capital Markets.
"This deal puts a significant dent in hopes of a potential acquisition," Wible wrote in a note to investors. "Given that the Epix content is among the most expensive and Amazon would not likely want to pay twice for the same content."
Epix CEO Greenberg said the three-year deal with Amazon "helps us reach new audiences and younger audiences" that like to watch movies on mobile devices.
Amazon did not disclose the terms of the deal, but the company is "investing hundreds of millions of dollars to expand the Prime Instant Video library," Bill Carr, vice president of video and music at Amazon, said in a statement.
Earlier this year Apple began talks with Epix. Apple, whose iPad competes with the Kindle Fire, has been building content offerings for products that many believe will soon include a full-fledged TV set.
The deal with Epix, which brings Amazon's library to more than 25,000 titles, comes as Amazon is expected to unveil a new version of its Kindle Fire tablet this week. Last month, Amazon announced it was adding past seasons of NBC shows such as "Parks and Recreation" and "Friday Night Lights" to the Amazon Prime streaming service.
Apple is holding a major event on September 12 and is expected to take the wraps off its latest iPhone.
(Reporting by Alistair Barr in San Francisco, additional reporting by Lisa Richwine in Los Angeles, Jennifer Saba and Liana Baker in New York; Editing by Maureen Bavdek, John Wallace and Leslie Gevirtz)