The new iPhone's eReader has been referred to as a potential killer app, not that the iPhone really needs one. Having seen one in action I'm not sure this app will kill other cell phone sales as much as it will simply give iPhone owners a very good reason to pass on the Kindle. I can't picture many prospective customers saying, "wow, that eReader app is the reason I'm going with the iPhone 3G and not the xyz phone." On the other hand, I can definitely see iPhone 3G owners saying, "why should I spend another $350 on a Kindle when I get a reading experience that's 'good enough' with eReader on my iPhone?"
Here's an excellent review of the app from Joe Hutsko over on Salon. He notes that the lack of a backlit display is one of his biggest gripes against the Kindle. Another reader of Hutsko's post beat me to the punch by stating why the Kindle is backlit-free. To be blunt, backlit displays are harder on your eyes and the eInk technology is all about reading comfort. That's why my eyes go nuts after a couple of hours of working on my laptop but I can read all day on my Kindle with no discomfort whatsoever. Sure, you need a separate light source for the Kindle but I rarely find myself needing to read in the dark.
Given the choice between a Kindle and an iPhone 3G I'd still go for the Kindle. I'll read a Mobi book from my Blackberry in a pinch but I wouldn't want that to be my primary reading device. It's too darned small and so is the iPhone screen. Heck, there are times when I think the Kindle screen is a tad bit too small, but it's still a far better reading experience than any other e-reading device I've seen so far. I'm also starting to realize that multi-purpose devices aren't always the best solution; I'd prefer the larger screen of the Kindle even though it means I have yet another gadget to lug around.
P.S. -- On a related note, here's a formal announcement of Sony's decision to embrace the EPub format. The net result is that Sony Reader owners will have more content alternatives than just the Sony store. It's a good idea for Sony but I don't think it's a compelling reason for customers to pick their Reader over the Kindle.