I don't know that this argument is necessarily valid. I own an iPhone but I don't own a Kindle, and haven't used one for more than a couple of minutes, but a lot of people I've talked to who own both swear by the Kindle's e-Ink screen. From what I hear, for long periods of reading, and for outdoor reading, the Kindle beats the iPhone (and because of things like screen and battery, not form factor).

Certainly, an Apple tablet could do a lot more than a large Kindle, but it won't necessarily "render it moot." The Kindle might still provide a better experience for the one function is it meant to: reading large quantities of text... and if there is a market for for a device that just does that (and there seems to be judging from the Kindle's early success so far), then it will likely continue to do well.