I don't really see the Fire as direct competition to the iPad. I think it mainly competes in the same space as Amazon's very popular B&W Kindle.
I bought an iPad (original) the day they were released. It has been used more than any of my computers, ever. The convenience of jumping on the web, reading magazines, blogs, news, etc...was perfect on a tablet and much better than a laptop for consuming media.
About 7 months after getting the iPad, I was summoned to jury duty. I thought about bringing the iPad, but it was a bit cumbersome, would not fit into my coat pocket, and was too noticible to be carrying around in a seedy part of Memphis. I deciced to pick up a Kindle(3) for the occasion. It was a bit expensive for a week of jury duty. but I also liked the fact that I could read it in the sun.
Nowadays, it sits next to my favorite reading chair and I use it instead of the iPad when I am reading in that space. I also like to use it all summer during visits to the beach and while laying in a hammock next to the pool. In other words, it fits nicely side-by-side to my iPad use.
The Fire competes a bit more in the same space as the iPad because of its multimedia focus and color screen, but I still think many iPad owners will buy it for some of the same reasons I bought the Kindle. Also, I think some people that would never spend $499 on a gadget, will be more willing to fork over $200.
One of my buddies that has an iPad is buying one. I asked him why, and he said portability and price. While Apple has the iPod Touch at the same price point as the Fire, I think the Kindle is more usable (for reading and web surfing) because it has a bigger screen than the Touch. In other words, it fits between the Touch and the iPad, but fills a niche that the last Kindle used to fill.
I really think Apple should reconsider putting out a 7 inch iPad that fits in the $250 to $299 price point. It would have the ability to have apps for Kindle, Nook, iBooks all on one device at a similar price point. It should make it easy to recommend for an extra hundred bucks. Until then, I think Amazon has a winner on its hands. But, I think people that want an iPad will not see the Fire as a substitute because it is much less capable and smaller than the iPad.