I agree that Amazon is reacting to competition, but I don't think it's mainly from Apple as much as from B&N's nook. The iPhone and the Kindle are starting from opposite ends of the spectrum. The Kindle is a gradual technology improvement (debatable) over a paper book, and is slowly growing in capabilities, whereas the iPhone was a fully-loaded device just begging for apps.
The iPhone was overbuilt with graphics capabilities, so lots of people saw the obvious possibilities. Consumers and developers begged and pleaded with Apple to LET them develop for the iPhone, and in typical Apple fashion, they kept everybody locked out for a long time just to heighten the anticipation. (You don't really think Apple didn't plan an SDK from the beginning, do you?)
I mean, who looked at a Kindle and thought, "Wow, that would be great for games!" ??? As far as I can tell, nobody. Amazon is mirroring the incremental improvements of the early computers- monochrome, small screens, closed systems gradually improve to more shades of grey, larger screens, and somewhat open platforms.
Nobody in the market for portable games (or photos, or video, or web surfing) is going to choose a Kindle over, say, and iPod touch or iPhone.
No, Amazon isn't reacting to Apple, but is just trying to stay one very small step ahead of the nook. If the Apple tablet does have e-book support, then the Kindle will only be able to compete on price, battery life, and catalog, but it will remain a niche device.