Apple can make kindle out of the Kindle with a free (or cheap) PDF/eBook reader for iPhone/iPod touch. Millions of people already have the devices, many millions more already have thousands of PDFs on their hard drives and downloading them can be as easy as using iTunes.
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You've obviously never used an E Ink display before. The iPhone cannot seriously compete in this space.
The kindle's e-ink technology is very impressive. It is easy on the eyes and works well in sunlight -- especially compared to my iphone.
It's also nice that you can read only using one hand. Since you don't have to turn your head or flip pages, I can actually read faster.
If Amazon can beef up its experimental web browser, the kindle would pay for itself with its free wireless.
The only drawback to e-ink is that it is very slow. It would be hard to leverage the technology for more interactive applications like games or video.