Shares of Netflix fell almost 3 percent after news of the venture, which will combine the Redbox DVD rental kiosk business with an Internet video offering from Verizon.

The alliance will mark Verizon's first foray into video streaming outside of its network operating region as the telephone company currently only offers Internet video services to customers using its FiOS television service.

However, the venture's success in competing with Netflix and other online rivals like Amazon.com and Hulu Plus, will depend hugely on the price of the service and the depth of content it has available, according to analysts.

Verizon and Coinstar will likely have to invest heavily to convince Hollywood studios to participate if they are to offer a comparable service to Netflix, Daniel Ernst, an analyst at Hudson Square Research said.

"The question is, how much are they investing to get a large library of programming? Netflix is spending up to $1 billion a year on content," said Ernst. "For me, it's doubtful that these two companies will invest to that level."

As Netflix has shifted its emphasis to instant-view streaming from its mailed DVD rental service, it has had to write ever-heftier checks to content.

Verizon did not disclose how many of its FiOS TV programming partners, if any, had agreed to make video content available for the streaming service.

The partnership follows a December 6 report from Reuters that Verizon was planning a standalone streaming video service.

Analysts said it makes sense for Verizon, which has spent about $23 billion building its FiOS TV network, to create an online offering in the hope of increasing its TV subscriber numbers. But Pacific Crest analyst Steve Clement complained that it did not give enough details to get investors excited.

"We don't know what kind of content they'll have available, what they'll pay for that content and what they'll charge for it," said Clement. "There's way more questions than answers at this point."

He noted that a big part of Netflix' success was due to its easy user interface and recommendation of TV shows and movies based on its subscribers viewing history.

Netflix had 24.4 million U.S. subscribers at the end of December, while Verizon ended the year with 4.2 million FiOS TV customers. Coinstar rents out DVDs at $1 a day and Blu-Ray discs for $1.50 a day from kiosks in locations such as supermarkets.

The venture -- to be 65 percent owned by Verizon and 35 percent by Redbox -- will offer its first products in the second half of 2012, the companies said.

Shares in Netflix fell $3.54, or 2.8 percent, to $122.89 in morning trade on Nasdaq, where Coinstar shares pulled back from an earlier increase of up to 7 percent but were still up 66 cents, or 1.38 percent, at $50.33. Verizon edged up 6 cents to $37.90 on the New York Stock Exchange.

(Reporting by Sinead Carew; Editing by Lisa Von Ahn, Mark Porter and Gunna Dickson)

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