One very interesting aspect that I haven't seen mentioned yet is that Netflix does a LOT on AWS. I wonder if seeing their infrastructure provider start competing more directly with them, makes them rethink that.
The point is that innocent statistics about Netflix's machines gathered for routine "security" and other housekeeping efforts can lawfully give Amazon a lot of information about Netflix.
IMHO, Netflix has needlessly put themselves in a vulnerable position by moving to Amazon.
Google has every bit of information about Groupon and LivingSocial AdWords spending (millions of dollars per month). When Google launches their competitor, Google Offers, they'll know exactly which ads get people to buy deals. Incidentally, Google Offers will work by running offers across Google ad networks.
http://www.meetup.com/cloudcomputing/events/16395288/ (link to paper about their experience).
I have both Netflix and Amazon Prime and would probably drop Netflix if Amazon had a better selection. If most users are like me, this means that Netflix has to increase their catalog, which has both technical and licensing implications. On the technical side it's caching and long-tail inefficiencies which will increase their infrastructure costs. If they are still using AWS (the Mercedes Benz of cloud hosting), I'm sure it's because their margins are high. Given their size they could get a much better deal with another provider.
Second, at <$10/mo, the cost is not high enough to make bother with switching. I would rather pay $10/mo have the best streaming experience than pay $6/mo have a second-rate streaming experience.
I expect Netflix to come out on top in this battle. Obviously, I'm rooting for them (I dislike companies which squeeze competitors through loss leaders).
I think Amazon is too big to try something funny - because they are big, a dent in their reputation would probably also hit them big. Who would still want to host on AWS if they would let down Netflix?