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Hollywood's new love affair with the internet

Letterman on Netflix
Letterman on Netflix 00:19

A decade ago, Hollywood celebrities released their work on the internet only when traditional means of distribution on TV and movies weren't available to them. 

Now, the web is the place where many of them want to be, thanks to the surging popularity of streaming services such those from Netflix (NFLX) and Amazon (AMZN).  

Netflix recently lured away "Grey's Anatomy" and "Scandal" creator Shonda Rhimes from Walt Disney's (DIS) with an offer she said was filled with "limitless possibilities." Late-night legend David Letterman also signed a deal with the Los Gatos, California, company for a six-episode series. They have plenty of company.

Comedian Chris Rock signed a deal for two specials for Netflix for a reported $40 million. Comics Dave Chapelle and Jerry Seinfeld also will have specials on the streaming service. Not to be outdone, Amazon has joined forces with filmmaker Woody Allen, the estate of famed mystery writer Agatha Christie and "Walking Dead" creator Robert Kirkman. 

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Netflix estimates that it will spend $6 billion on content this year. Amazon, which provides access to its video entertainment through its Amazon Prime service, isn't pinching pennies either, with an estimated $4.5 billion programming budget, according to JPMorgan (JPM).

"While Amazon is funding its new contracts and projects with profits from other areas of its business, Netflix is digging itself into a deeper negative cash flow hole," wrote Wedbush Securities analyst Michael Pachter in a note to clients. Pachter rates Amazon as "outperform" and  Netflix as "underperform." 

"Netflix is at the mercy of content owners," he said, "and can only secure its future and justify its valuation if it successfully develops compelling owned original content."

Both companies, which also produce movies, cleaned up during awards seasons. Netflix received 91 Emmy nominations across 27 shows, second only to Time Warner's (TWX) HBO, which had 111. HBO, however, started in 1972, while Netflix dates to 1997 when founder Reid Hastings decided to start a rival video rental service after his treatment by former employer Blockbuster angered him. 

The once-dominant chain has now about 150 stores while Netflix is synonymous with streaming. Amazon earned 16 Emmy nominations across six shows.  

Shares of Netflix, which has more than 100 million users, fell 40 cents to $171 in Monday trading, but it's up 38 percent so far this year. Amazon jumped $15 to $983.30 on Monday and is up 31 percent for the year. The e-commerce giant doesn't disclose how many people have signed up for Amazon Prime. 

Apple vs. Netflix? 02:29

According to Pachter, Amazon is using e-commerce expertise to conquer Hollywood.

"Amazon is capitalizing on its strong user engagement (its users are used to rating products on its site) by allowing users to rate pilot episodes before green-lighting shows to full seasons," he wrote. "We believe this significantly reduces Amazon's risk with original content and lowers its overall spend."

Some performers are connecting directly with their fans over the web on their own dime, bypassing even the streaming video giants.    

Adam Carolla, known for his work on TV and radio, told CBS MoneyWatch last year that he invested $175,000 in building a studio in the same warehouse where he houses his car collection. His business, Carolla Digital, produces a dozen shows including "The Adam Carolla Show," the world's most downloaded podcast. He also makes documentary films.

Comedian Louis CK decided last year to sell a 10-episode series he financed himself, "Horace and Pete," set in a bar, directly to fans for $31. According to media reports, the 49-year-old comic made back all of the money that he invested in the show.

Investing in content, however, isn't without risk. Funny or Die, the decade-old comedy website whose founders include former Saturday Night Live performer Will Ferell, recently closed its New York City office. 

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