Cloud computing is experiencing a meteoric rise in the IT sector, and every day we hear about larger players leveraging cloud infrastructure in place of traditional, conventional data center architectures.

On that note, it recently came to our attention that NetFlix is spending in excess of $40M per year with Amazon S3 to host several Petabytes of data for its NetFlix Streaming service.  What this really means is that NetFlix is indirectly funding Amazon’s growth in the Video-on-Demand (VOD) space, strengthening and fortifying one it’s most dangerous competitors.

Let’s face it, Amazon is ruthless and vicious when it comes to the markets it wants to dominate. Books, DVDs, electronics, mass retailing, period—Amazon has emerged as a powerhouse that will steamroll anything and anyone in its path to accomplish its strategic business objectives.

Just look at the body of evidence. Borders filed for bankruptcy. Circuit City is kaput. Best Buy is closing stores. And Amazon’s cloud computing business is set to break the $1B barrier this year, taking customers right out from under the feet of IT industry stalwarts such as IBM, EMC, NetApp, HP and Oracle—while collecting checks from direct competitors like NetFlix.

Amazon CEO Jeff Bezos is no fool. He realizes that selling physical media is rapidly becoming a business that will go the way of the Laserdisc. Which is why the company is rapidly building up its VOD services—offering its millions of customers a viable alternative to NetFlix Streaming.

The fact that Amazon Prime members now gain access to over 5,000 videos on demand should be of great concern to NetFlix, particularly as Amazon ramps up this business and competes with NetFlix in the battle to acquire additional, new movie and TV content. By being the data backbone for NetFlix, Amazon can methodically chart out a course to ultimately eclipse NetFlix at its own game.

HBO and the major Hollywood studios have caught onto NetFlix’s game, and they aren’t going to make new video content available for cheap. There will be no more deals like the film library that NetFlix acquired from Starz on the cheap. NetFlix will be competing with Amazon to acquire the same content going forward, and it’s NetFlix here that is at a disadvantage by helping to make Amazon a stronger competitor by indirectly funding their VOD expansion.

I think that NetFlix and Amazon will head down the same path as other tech company partnerships  that ultimately ended in divorce when the competitive stakes got too hot—such as Cisco divorcing HP over the battle for data center networking; Dell buying Compellent to ultimately rid itself of EMC’s midrange CLARiiON storage lineup, and Oracle dumping Hitachi in the battle for the high-end enterprise storage space.

What is NetFlix thinking?   Sure, leverage the cloud, but why not a cloud service provider that doesn’t sell VOD ? There are other non-threatening cloud service providers, pure plays, out there that don’t compete for the same customers that NetFlix is courting…companies such as RackSpace, Nirvanix, and Saavis.  Or NetFlix could build their own capability.

NetFlix should be careful not to fund a formidable competitor such as Amazon.