I think a lot of the reviews and analysis of the Kindle Fire are missing a key comparison. Although the iPad, GalaxyTabs, and Xooms of the world are relevant, equally relevant (and perhaps more so) is the iPod Touch.
Like the Touch, there's no cellular connectivity. Like the entry-level Touch, it is 8GB. Like earlier generation Touches (which sold fine), it lacks a microphone, camera, etc. And its screen is far bigger.
And so, for a lot of people who wanted apps (games) and media (movies/TV), the Fire will be an attractive alternative. I don't think this matters much for Apple today. Perhaps with a deeper pool of users built on this first Fire, a larger Fire will present a real alternative to the iPad. At the same time, so long as the Fire concentrates on being a delivery system for Amazon-sourced content (and so leaves off features that work for apps but not for content - such as a front-facing camera), they may simply co-exist peacefully (and, by further fragmenting Android and, in any event, "unconcentrating" it, make it harder for an Android competitor to the iPad to succeed).