I love Amazon, they’re one of the few companies who like Apple, understand that for a consumer product like a phone/tablet to succeed, it needs an ecosystem to back it, not just the hardware/software to run it. Amazon is also in a unique position of being in charge of one of the biggest ecosystems for media on the planet.
The focus of the Fire on media consumption through Amazon’s ecosystem is brilliant. The price point (my wild guess is that they’re selling it at a $1-200 loss per sale) is the razor-blade/printer equivalent of tablets. My assumption is that the play that Amazon is trying to earn most of the money on content sales rather than hardware. Assuming a 2 year lifetime, $1-200 is easy to spend on content (especially $10 books and $3-4 movie rentals).
They also cleverly designed the UI to play to the strengths of the Fire. As opposed to the iPad (whose strength is the Apple store) which features apps on the home screen, the Fire features content on the home screen. These sorts of UI decisions influence how people use and perceive the product, and Amazon wants people to know that this is a media consumption device.
The iPad 2 weighs 21.28 ounces, the Kindle Fire weighs 14.6 ounces, this will make a big difference when holding it up for elongated periods of time for reading. I just bought one of the new Kindles (the most basic one) for the sole intended purpose of reading. I’ve never been able to read books on my iPad. The combination of a backlight, the weight, and the screen resolution is a deal-breaker for me. I haven’t played with a Fire, so I don’t know whether or not it suffers from the same resolution/backlighting problems of the iPad for reading, but the weight will help a lot.
The 7" form-factor is an aspect which doesn’t sit well with me. One of the pleasures of using an iPad is the size of the display. Multi-touch gestures are extremely natural and comfortable on the iPad, web content designed for large computer displays feels natural at 10". The Galaxy Tab 7" is the only 7 inch tablet I’ve played with, and it felt smack-dab in the middle of being big enough to be comfortable, and small enough to be portable. The difference between the Tab and the Fire though is the same as the difference between the iPad and the Fire: The Fire is intended for serving a smaller subset of use-cases which are less interactive: Reading books, watching movies, listening to music, etc. so it may be less of an issue.
Overall, I think it is a well-rounded product with a string backing ecosystem, I can’t see why this product won’t be a runaway hit. However, I don’t think anyone seriously considering an iPad would opt for a Kindle Fire instead. My hypothesis is that people who were on the edge about spending $500 on a tablet will be much more inclined to buy a Kindle Tablet, which will increase the size of the market, but won’t cannibalize the sales of the iPad.