Not sure how they plan on competing against Steam. Unless there was a way to pull off OnLive somehow on Twitch. I fail to see the significance of this announcement.
Most of the value Steam offers Amazon/Twitch will likely offer over time (shared servers/friend status etc...). The supply chain that Amazon offers for physical games though would be nearly impossible for Steam duplicate.
Additionally, the general customer service experience with Amazon is phenomenal. If this is brought to Twitch, that alone is an improvement over Steam's treatment of customer.