The Amazon Fire is a " $199 gadget" going up against the $499+ iPad? As I've already suggested, I think that if the Fire shows that there's a significant market for a mini-tablet computer, something that's sized in between the iPad and iPhone, Apple will add such a device to its line-up.
Top this off with Amazon’s cloud storage, the ridiculously cheap Amazon Prime service ($79/year gets you cloud storage, free 2-day shipping, and a bunch of online streaming video) and the new cloud-based Silk web-browser, and the Kindle Fire looks hard to beat.I would venture that if offering an inexpensive library of streamable content proves to be a huge selling point for the Fire, Apple will offer such a service. If it finds that adding features to iCloud will better position it against a popular competing product, I expect that it will add those features. (So far this doesn't seem like much of a challenge, even with my poor track record.)
Fundamentally, the issue is not so much that "Amazon has a great new device that nobody else has been able to create." It's that Amazon is selling an Amazon-branded device that is comparable to mini-tablets unsuccessfully marketed by other vendors. As Kain observes,
The biggest threat to Apple, however, is the infrastructure that Amazon offers its customers. Few of Apple’s competitors already have a large online offering of music, streaming video, and eBooks. Amazon has that in spades, and a healthy e-Reader business.That is, unlike the company that produces the Fire, Amazon can offer a tempting array of content to buyers and, for that reason, can expect to sell a considerable number of devices at a price point that not even the manufacturer can match (i.e., Amazon can treat the Fire as a loss leader) while offering a product that is a lot more appealing to the consumer.
But that's not all bad news for Apple.
If Amazon effectively monopolizes the low end of the market, offering tablets at a loss in order to sell subscriptions to Amazon Prime and to push book sales and movie rentals, it will make it considerably more costly and difficult for manufacturers (other than its suppliers) to stay in the tablet game. As much as Amazon may be willing to sacrifice profits for market share, its suppliers will need to turn a profit - not just for R&D, but simply to stay in business, so the price can only go "so low". At some level, Amazon will have to choose between pressuring suppliers for cheaper product and starving them of the capital they need to develop and manufacture quality products. A reduced number of manufacturers would also likely translate into a significantly reduced incentive for Google to produce an OS for tablets, particularly if the bulk of Android users were making purchases through Amazon's app store instead of Google's.
If Amazon were only interested in pushing out its "Prime" content, it could do so through an iPad app. If Amazon were primarily interested in selling tablets, it can do so without having Amazon-branded tablets. The actual competition would appear to be for the most lucrative corner of the market, the sale and rental of music, video and apps, from which the store owner can take a @30% cut.
As much as Apple likes to sell hardware at high margins, I expect that their business plan contemplates a future in which tablet hardware is a commodity item and the "real money" comes from the store, so I really don't think that there's anything in the Fire that would take Apple by surprise.