According to a recent report on Forbes.com, one particular iPhone application is stepping on the toes of the Kindle ebook reader. So much so, speculation suggests the app will outsell Amazon’s one trick pony device by the end of the year.

Stanza is an iPhone application developed by Lexcycle, a company based in Portland, Oregon. The app is an ebook reader which allows users to read public domain books downloaded from the internet. The app has been downloaded from Apple’s App Store a reported 395,000 times and with an estimated additional 5,000 installs per day Stanza is expected to outdo the Kindle’s estimated sales figure of 380,000 units in 2008. Not so great considering the App store only opened in July and the Kindle has been available since last November.

Supporting a whole range of formats (Amazon Kindle, Mobipocket, Microsoft LIT, PalmDoc, Microsoft Word, Rich Text Format, HTML, and PDF), MacNN reports that Lexcycle hopes to to sell books through Stanza with a portion of revenue going to publishers, imitating the Kindle. So why are people opting for Stanza over the Kindle?

For a start, the iPhone does the three things Apple feels everyone sees as a necessity: Phone, internet, mp3 player. Phone calls, mobile browsing and music are all mandatory and any of the third party applications available from the App Store are extras you can add on if you want them. If you want Tetris, you can have Tetris, if you don’t, no one is going to try and sell it to you. The Kindle does one thing and some think that’s where it falls down. Sure, a lot of people want to buy a device that will save them lugging around a dozen books at a time but that potential market will always be dwarfed by an existing market where thousands are already using the device for who knows how many other things and can simply add books in at no extra cost.

That said if you think the Kindle will hold it’s own against the iPhone, you’re not alone and to an extent, that may be true. It has a bigger screen and while it might not be as easy on the eyes compared to the iPhone, many people feel that the extra screen space is worth carting around a separate device because it feels more like reading a book than a really, really long email. Stanza might be free but we’re willing to bet there’s more than one person who started out with Stanza and upgraded to a Kindle after they got used to reading a novel on an electronic device. Who knows, maybe Stanza will boost Kindle sales?

While there are those who believe Stanza is the Kindle Killer and those who think Kindle will hand onto what is arguably a niche market, the former make the fair point about availability. Stanza can be downloaded by anyone who can access the App Store, the Kindle offers internet through Sprint’s EVDO network and so is so far only available in the states — not great when you’re competing with the iPhone.