Amazon has no hope of competing with Apple to be the best general computing tablet platform, so trying to match the iPad feature for feature will drive up their cost and still leave them with an inferior product. The two other stable competitive positions are either to go cheap or to go niche.
In his 1980 classic Competitive Strategy: Techniques for Analysing Industries and Competitors, Porter simplifies the scheme by reducing it down to the three best strategies. They are cost leadership, differentiation, and market segmentation (or focus). Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope.
This will be hard for Amazon because, before the iPad, they were clearly the differentiated premium market-leader, but now that market has been subsumed. The only hope for Kindle is to become the cost-leader and to let third-party developers turn the Kindle into cheap niche devices.
Once the KDK is available, we’ll see the top end come down to about $400. Amazon can do this because they’re set to make money from their free 3G, in the form of subscription applications. I’m sure a significant component of the $489 price is to offset the expected 3G use that isn’t offset by book sales.
This strategy is more in line with Amazon’s online retail strategy. They currently compete on price and let third-party stores focus on niche markets. Even though Porter cautions against trying to have two strategies, it can be overcome if different business units focus on each strategy independently — what could be more independent than a third-party.