Looking at all the hype going around, you'd think that it was already set in stone. The Kindle is the new iPod, and Amazon (NASDAQ:AMZN) the next Apple (NASDAQ:AAPL). A tech giant dominates a new consumer electronics market by providing just the right mix of hardware, software, and digital content. And as the market takes off, the company's investors can sit back and reap the profits for years to come.

There's only one hitch here, in Amazon's case: According to In-Stat, worldwide electronic reader shipments totaled just 1 million last year. Sure, there's going to be explosive growth over the next few years -- iSuppli estimates 18 million unit sales in 2012, while In-Stat sees 30 million in 2013 -- but that leaves plenty of time for the competitive landscape to change before a market leader is firmly established. And though the press doesn't always remember it, Amazon already has a strong competitor in Sony (NYSE:SNE), which (according to iSuppli) controls 30% of the electronic reader market to Amazon's 45%.

Now, with the announcement of its Reader Daily Edition product last Tuesday, Sony looks ready to mount a strong challenge to Amazon's supremacy. The Daily Edition, due out in December, is the first reader that Sony's developed that matches Amazon's wireless download functionality, using a 3G modem to connect to AT&T's (NYSE:T) network. With this big competitive weakness taken care of, Sony now has a better chance at leveraging the Daily Edition's competitive strengths, which include:

  • A touchscreen. This makes it easier to take notes and highlight text and, by eliminating the need for a physical keyboard, also makes the Sony device smaller than the Kindle 2, even though it has a slightly larger display.
  • Support for the EPUB digital book format, which, unlike Amazon's proprietary format, allows for book downloads from multiple sites and support for readers from third-party manufacturers.
  • Access to free content, thanks to a deal with Google (NASDAQ:GOOG) to provide downloads of public-domain books, along with a deal to let users borrow digital copies of books from local libraries.
  • Retail distribution. This could be a big one. While you can only buy a Kindle 2 or Kindle DX from Amazon's site, Sony expects the Daily Edition to be available at over 9,000 retail outlets, including Best Buy, Borders, Wal-Mart (NYSE:WMT), and Target (NYSE:TGT) stores. Aside from the stronger retail presence, this also gives would-be buyers a chance to put their hands on the device before pulling the trigger.

Of course, Amazon has some competitive strengths of its own. At $299, the Kindle 2 costs $100 less than the Daily Edition. Amazon's software has been praised for being user-friendly, and the Kindle Store can leverage Amazon's treasure trove of customer book reviews. But the Daily Edition does establish Sony as a serious competitor, and there could be others on the way. 

In early 2010, a startup called Plastic Logic will begin selling a reader in conjunction with Barnes & Noble that combines wireless functionality, a touchscreen, and an 8.5-by-11-inch flexible display. And though the much-rumored Apple tablet may not be a direct competitor to the Kindle line, since its reported use of an LCD will lead to a shorter battery life and less pleasant book-reading experience than the E Ink technology adopted by Amazon and Sony, it could still appeal to casual readers looking for a more versatile device to carry around.

Amazon bulls are expecting big things from the Kindle. A recent Cowen & Co. report estimated $2.3 billion in Kindle-related revenues for Amazon by 2014, with over $1 billion of that coming from high-margin content sales. Considering the size of the market opportunity and Amazon's success thus far, it wouldn’t surprise me much to see those dreams realized. But investors need to keep in mind that it's still very early in the game, and the Kindle hasn't reached iPod-like stature just yet.