Good intuition or paranoia, Netflix sure does a good job at peaking the interest of the technology scene. In a letter to shareholders disseminated yesterday, Netflix says Amazon was advised to spin off Amazon Prime’s streaming video section, Instant Video, to compete with Netflix’s Watch Instantly service.

“One class of competitors is the other over-the-top pure plays such as Hulu Plus and Amazon Prime,” the letter reads, adding, “We expect Amazon to continue to offer their video service as a free extra with Prime domestically, but also to brand their video subscription offering as a standalone service at a price less than ours.”

Amazon’s Instant Video comes free with a $79 subscription to Amazon Prime though non-subscribers can still buy or rent individual movies and TV episodes on a per-title basis. The New York Post said the new service would be derived from the Netflix’s business model in a way, but spokespeople from both Netflix and Amazon have yet to comment on this speculation. The report also said that Amazon is already working on the matter, but has been having a tough time with licensing.

“The big issue is their bundled media service,” spills the “unnamed digital media executive” to post. “The subscription service, with the goodies being free video, is contractually an issue for the licensers.”

Amazon is not at all new to the streaming content space, as it holds Lovefilm in the UK. The subsidiary successfully offers DVD rentals by mail, and streams content online to subscribers as well.  It has been doing so even before Netflix took up a similar business model with international appeal. Amazon was Lovefilm’s largest shareholder in 2008, until last year when it finally took ownership of the company.

But Netflix doesn’t seem to be that worried about the potential and current competition from Amazon, or Hulu Plus for that matter, as “both Amazon and Hulu Plus’s content is a fraction of our content, and we believe their respective total viewing hours are each less than 10% of ours.”

There’s also the issue of whether or not Amazon can win over the hearts of Netflix users with a price war.  Netflix has recovered quite well from its price hike and product changes last year, as their sales and user base continue to increase. They currently have 220,000 consumers and earned 21.6 million in Q4 2011.