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The Kindle Fire serves entirely different purposes than to take marketshare away from Apple. When faced with the task of bringing a not-sucky $200 tablet to market, Amazon refused to skimp in two areas: compute and the display.
The SoC doesn't sound fast anymore, not with Tegra 3 and Krait waiting around the corner, but the OMAP 4430 is still one of the fastest things you can buy today. The Fire is equipped with only 512MB of RAM but, once again, if Amazon does its job on the software side this should be sufficient. The display is small by iPad standards, but as I mentioned in our PlayBook review, it does make the device far more likely to be by your side wherever you may go. The standard Kindle's e-ink display is beautiful to read pages of books on, but it is hardly desirable for images or web content. Even when I'm not out and about, the PlayBook is quite usable as a content consumption device.
It's in the couch-lounging usage model that the PlayBook does fall short of the iPad or Xoom. Hardware wise, the extra 8GB of internal storage, extra 512 MB of RAM, and microSD slot, I think it;s worth it. I don't understand why you are comparing the Fire with all the tablet out there that's in a different class. Yeah I read a review on Ars about it and they think the Nook tablet is a more capable product but Amazon has the edge in the ecosystem department, link posted on this thread somewhere if interested. For users who are content reading ebooks on an e-ink screen, the vanilla Kindles are as good as they get. It features two fully equipped Cortex A9 cores (complete with MPE), a 1MB shared L2 cache, two 32-bit LPDDR2 memory channels and a PowerVR SGX 540.
Moving to 1GB would allow you to keep more applications active at once and pave the way for more textures in games, but as I just mentioned, the Fire isn't much of a gaming platform to begin with.
The iPad and other 10-inch tablets make for a far better web browsing experience, but they are too big to just carry around with you like you would a wallet or smartphone. The 7-inch 1024 x 600 screen hits 400 nits at its brightest setting, and its black levels are reasonable at 0.45 nits.

Interestingly enough there's no difference in brightness once you get below 25% on the slider control. The hardware in a plain old Kindle allows Amazon to build something ultra thin and ultra light. It's virtually impossible to read a magazine (in magazine view) fully zoomed out like you would a book. In portrait mode fonts are a bit too small for me to read comfortably on the couch but in landscape it works well as a reddit browsing machine. But in terms of portability the PlayBook is clearly a much better balance of functionality and mobility. The current proprietary tablets (Nook Color 2 and Kindle Fire) are a lot less compelling due to the arrival of non-proprietary tablets at the same price point. If you lay down a floor plan that keeps high power drain areas apart but still keeps latency low.
The problem is for users looking to consolidate devices, they may find themselves carrying a Kindle and a tablet of some sort (likely an iPad) and will ultimately ditch the Kindle in favor of the iPad.
The third thing you need is efficient software, which is something Amazon attempted to deliver by customizing Android, but I'll get to that later. CPU clocks aren't as high as they could be at 1GHz, but if Amazon does its job well enough on the software side they should be sufficient.
The Kindle Fire is bigger than anything that should occupy space in your wallet, but it's small enough that you might actually take it wherever you go. The 2nd generation Kindle was both thin and light enough that it could truly be a book replacement. The Fire is light enough to be held in one hand but when reading for extended periods of time I still find myself having to support the device with my chest if I'm lying on my back. Moore's Law has yet to give us something that can perform as well as the Fire while operating within the confines (battery included) of a regular Kindle. In text mode reading magazines or books is as pleasant as can be given that you're staring at an LED backlit LCD. I found myself preferring the text view of magazines I tried subscribing to on the Kindle Fire.

Locking all but 1GB of its memory to B&N content sucks, but I'm sure someone will take that limitation off. If the other Android manufacturers could put android 4.0 on an equivalent tablet to Kindle Fire, and price it at $250, I'd pick that one any day. To put things into perspective, this is more general purpose compute than the original iPad and something competitive with the iPad 2. I suspect that we'll eventually get to that point, however it may take a good three years for that to happen.
If you're just going to be reading books, the experience on a vanilla Kindle is better. Really.2) The lack of Google native apps results in my using the browser for gmail, Reader, et al. You can still get all Amazon's services on the full Android, too, so no point limiting yourself for $50. The search for an iPad killer reminds me of the search for a Voodoo killer back during the heyday of 3dfx in the late 1990s. If they want a more affordable tablet however they are likely going to be forced into a solution that's probably not very good. The advantage to the Fire of course is that you can do more than just read pages of text - it's good for magazines and web pages as well.
You get a really great browsing experience compared to a smartphone, or a really cramped browsing experience compared to an iPad. WHen it gets replaced, if it does, it probably will be by a true, un-walled-gardened, tablet. Neither possibility is something Amazon likes, so the obvious answer is to offer a Kindle that delivers enough of the tablet experience that will satisfy those users looking for more than an e-ink Kindle could provide. Yeah, I get the Christmas rush thing, but I don't have experience with Amazon updating software.

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