Netflix ( NFLX) and TiVo ( TIVO) jumped Friday as two wheezing tech favorites formalized their video-on-demand partnership.

Netflix jumped 8% and TiVo rose 4% in midday trading after the two companies said late Thursday that they had formed a joint development agreement. The move came about a month after Newsweek reported the linkup, setting off a rally in the once-beloved stocks that has mostly dissipated.

While the move combines two well-known names in home video entertainment, no terms were disclosed, leaving a number of questions about just how the companies plan to make the venture work.

After leading their respective categories, both Netflix and TiVo began to lose steam in recent years as rivals invaded their niches. To some, the sketchy joint venture confirms that both companies may be desperately reaching for some differentiation strategy, now that their corners on the market have grown crowded.

In recent months, both Wal-Mart ( WMT) and Blockbuster ( BBI) have launched DVD-mailing ventures to compete with Netflix.

Similarly, TiVo was a pioneer in digital video recording that allowed users to record TV programs on set-top hard drives. But now, despite legal claims on proprietary technology, TiVo has faced an onslaught of imitators offering generic digital video recorders.

Even worse, satellite broadcasters like EchoStar ( DISH) have been offering digital recording boxes to win new subscribers.

"We still question how TiVo will be able to build a large, meaningful retail subscriber base, when cable and satellite companies can afford to give away or at least heavily subsidize technologically more advanced DVRs," writes Vintage Research analyst Bill Kidd in a research note Friday.

Netflix fans point to its library of 25,000 DVD titles as a great opportunity for more growth if an Internet delivery solution is in the works with TiVo.

But industry observers note that the licenses for this digital media, held by Hollywood studios, may not allow Internet DVD distribution. Meanwhile, closely held Internet video rental upstarts like MovieLink and CinemaNow have already carved out movie-on-demand turf through licensing of compressed digital videos.

"Given that neither Netflix nor TiVo possess TV-deliverable content rights or a network," writes Vintage's Kidd, "we are left wondering how the coupling of these two companies can produce something superior or even competitive to what someone's pre-existing cable or satellite provider can deliver."

On Friday, Netflix rose $1.15 to $16.57, putting it just shy of its Sept. 7 high off the Newsweek report. TiVo added 27 cents to $6.89, leaving it a dollar above its peak that day.

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