The Fire/Amazon model has a much better chance of being profitable than Android in general, but it still suffers from the same fundamental problem that is becoming more and more apparent here in the USA. I give them credit for at least tightly integrating the shopping and purchasing process. And considering that most people buying these tablets and smartphones really don't know how to do that much on them, that's a very good thing.
Most people buy iPhones and iPads because these iOS devices are really easy to operate. There's not much of a learning curve at all. The App Store is front and center on the device and incredibly easy to figure out and thus start spending money on apps.
Most people buy/acquire Android-based smartphones and tablets because they're cheaper or free. But how many of those people can so easily figure out how to spend money on them? Everyone I know with an iPhone sits and talks about apps that they bought in the App Store no matter how tech savvy they may be, while most of the people with Android phones end up shrugging in confusion when they try to find something comparable on their phones. They end up using their smartphone to occasionally browse the web, check Facebook, send texts, get directions, oh, and to make calls.
Most people I know with Android phones have simply given up on apps. In the last year, I've noticed more and more people in my social settings with iPhones (largely thanks to the iPhone being available on Verizon and Sprint) and as they tap into the world of apps on the iPhone, the remaining Android users seem to be growing more and more frustrated and complacent. It's as if they consider themselves "second class citizens" but just don't want to think about it. There's always the IT nerds who love Windows who can find their way around, but that's a small minority of Android owners realistically. The rest don't seem to want to know about apps because they don't know how to find them on their own smartphone. It's the same for Blackberry users, and it really all boils down to the integrated, incredibly well-stocked App Store. (And for the record, even the tech-savvy Android phone users I know have or want iPads.)
The other issue is of course the fact that the many people buying Android devices or the Fire because it's cheap are the people least likely to want to spend money on apps and services even if they figure out how to buy them. Again, many of these people are slowly realizing that spending money might be worth their while, but when they decide to do so, that's when they buy the iPhone and iPad.
As much as the competition is seemingly "growing" in terms of shipments and people acquiring cheap/free devices, I'd say more than ever the iPhone and iPad are set up for ever-increasing long-term success. For awhile you could make an excuse for not having an iPhone because they were expensive or not available on your carrier, and at first you could just call the iPad and iTampon and laugh with a few people. Also, more and more Android phones came out that looked a lot like an iPhone and had "better" specs and all that, so people have had those too for awhile now. But then the iPhone landed on 3 of the 4 major carriers officially, got a lot cheaper (even free on AT&T) and now just about everyone has actually used an iPad.
So now, despite all the competitive options, the cheaper options, the better specs, the bigger screens, the smaller screens, the BOGO offers, the LTE, whatever...the iPhone and iPad still are considered the best smartphone and tablet by the vast majority of people. For most of the people I talk to who don't have iPhones or iPads, it's gotten to the point where it's become a matter of "when" they'll get an iPhone and iPad. With the iPhone, it's almost always "next upgrade" and with the iPad, it's when they a) can scrounge up the money, b) simply break down and buy it or c) when their laptop gets too annoying or breaks. Even the biggest Android nerds I know are starting to break.
So when Apple says all this competition is good, especially in tablets, I absolutely believe them. I really think the current iPhone and iPad sales numbers will look weak compared to what they'll do in the next 2-3 years. The storm has been brewing since 2007, but the full force of it hasn't even come close to hitting yet. iPhone on most carriers in the U.S., the iPad being adopted in enterprise and education and, well, just China in general; these three things are going to produce numbers that will blow peoples minds in the next 2-3 years.
Apple said it best in the iPad 2 commercials: they're just getting started.