By Kevin Kelleher, contributor
FORTUNE — Now that Amazon and Apple are rivals, which one is likely to win? For the next few years, at least, the answer will be both.
The rivalry between Amazon (AAPL) and Apple (AAPL) has been emerging for some time. Earlier this year, Amazon launched the Amazon Appstore for Android apps, and Apple quickly sued for trademark infringement. (Amazon maintained the term was a generic.) Shortly after, Amazon unveiled its Cloud Drive and Cloud Player, two media-storage services that put it on a collision course with Apple’s plans for iTunes.
The past two weeks have not only raised the stakes in the Apple-Amazon rivalry, it’s also offered a clearer indication of how it may shake out. First, Amazon announced its Kindle Fire, a tablet that many are saying could be the first solid competitor to the iPad, which still holds an 80% share of the North American tablet market. Then, Apple said its iCloud service, announced last June, would ship Oct. 12.
Both companies aim to host your entertainment content in the cloud. Both have huge, loyal customer bases to start from. And now, both are selling tablet computers that their customers can use to buy and access millions of songs, videos, apps, games and magazines.
But the rivalry isn’t likely to be a bitter, bloody one. Instead, it might prove mutually beneficial, at least for the next few years. Amazon’s store and iTunes have competed for years with little detriment to either. (The same can’t be said for Wal-Mart (WMT), however.) After Steve Jobs began publicly chiding music publishers, iTunes began offering DRM-free songs in April 2007. Amazon, following suit in May, made it that much harder for the labels to keep pushing for DRM.
Having two major digital-content retailers coaxing users to store their content in the cloud could speed up adoption of both iCloud and Cloud Drive. And in tablets, the Kindle Fire looks nothing like an “iPad killer.” Instead, it’s a relatively stripped-down version of the iPad, a tablet aimed at the low-end of the market, leaving the high-end open for Apple.
As appealing as an iPad is, many people in these tough economic times have held off on spending $500 for a tablet computer. That’s a big reason why the Kindle has remained a hot seller in the age of the iPad, defying early predictions that the iBooks and Kindle apps on the iPad would turn the Kindle into a fringe device.
Indeed, the original Kindle was not a fringe product. Amazon won’t disclose Kindles sales figures, but analysts estimate several million have sold, thanks in good part to its $139 price tag (now reduced to $109, or $79 with ads). The Kindle Fire is selling for $199 — $20 less than it reportedly costs to make.
With the Kindle Fire, Amazon is betting that people who see a tablet as an entertainment device might think $500 is too rich, but $200 is worth it. Early indications validate that: More than 250,000 pre-orders were placed for the Kindle Fire in the first five days, a pace that Cult of Android reckons is close to the iPad 2’s launch.
When the Kindle Fire launches, it will inevitably eat into Apple’s share of the tablet market. But that won’t necessarily mean it’s slowing Apple’s sales of the iPad. The Kindle Fire is setting up camp at the low-end of the market, leaving the high-end for the iPad. And with a robust offering of content-rich tablets at both ends of the market, tablets could become a device as ubiquitous in homes as the TV is today. The overall industry could see growth accelerate — the proverbial rising tide that will lift sales at Amazon and Apple alike, boosting both firms’ ecosystems.
For Apple, the concern is more likely to surface a few years down the road. Apple will be pushing to maintain its leadership without Steve Jobs, and maintaining the iPad’s allure as a high-end tablet will be grow harder in time (the iPhone 4S announcement left some convinced this is already happening in smartphones.)
When markets mature they become commoditized over time. This happened in the PC industry: What were once features exclusive to premium products migrate slowly down to the lower-end of the market, and price becomes the paramount factor for consumers. When that happens, the high-end gets smaller, becoming a niche.
Apple’s Macbooks have given it a lucrative and growing position at the high-end of a PC market where most of the machines sold are commodities priced at a several hundred dollars. For the next few years, the iPad will do the same in the tablet market. But once tablets become low-priced commodities, Apple will have its work cut out for it to retain the iPad’s innovative allure. That’s when it’ll have to pull the next big thing out of its hat.
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