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Amazon Europe has agreed to cough the cash to acquire the largest stake in DVD-by-post outfit Lovefilm. It'll sell its own UK and German DVD rental businesses to Lovefilm as part of the deal.

Subject to regulatory approval of the deal, Lovefilm will then be promoted on Amazon's European sites.

The deal is likely to pique competition regulators' interest. Lovefilm controls about 70 per cent of the DVD rental by post market in the UK, while Amazon has been growing at the expense of Blockbuster's sidelined postal service.

The market has consolidated rapidly in the last three years, as smaller players have realised they can't compete on price with warehousing operations like Lovefilm and Amazon.

Blockbuster meanwhile is struggling to deal with the threat from Netflix on its US home turf, and has neglected the booming European postal market. Helen Davis Jayalath, a senior analyst at Screen Digest, said the dominant high street player has ignored the internet. "I don't think there's been that much of a desire to build up that side of the business", she said.

The level of scrutiny directed at Amazon and Lovefilm will depend on whether watchdogs consider DVD rentals by post a market in itself, as opposed to part of the broader film-borrowing racket.

The pairing of Amazon and Lovefilm will be well placed to attack movie and TV rentals via legal downloads and streaming, pitting them against Apple's iTunes. Lovefilm's download service is up and running, while Amazon has yet to enter the European market. ®

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