Amazon just announced the Kindle Fire. It’s a Wi-Fi only, 7-inch tablet with a full-color, backlit, 1024×600 IPS touchscreen (video). It has a dual-core processor, and it weighs 14.6 ounces. It looks like a BlackBerry PlayBook. The resemblance is not an accident; as Ryan Block at gdgt reported on Monday, the same original design manufacturer (ODM) – Quanta Computer of Taiwan – made both, and Amazon’s Kindle team used the PlayBook’s hardware as a template.

But the similarities end there. The software is a custom fork of Android that has Amazon’s own feel, and it puts Amazon’s vast catalogues of digital content at users’ fingertips. In addition to the Kindle reader app, it offers Amazon’s Cloud Player for music, and Instant Video Player for TV and movies. It comes with a 30-day free trial of Amazon Prime, and it ships with Amazon’s own Android Appstore, rather than Google’s. With Android as the starting point, Amazon has built its own tablet experience on top of it. At $199, the Fire is now the top of the Kindle line. It ships November 15.

The Kindle Fire would not be possible without EC2, Amazon’s flexible cloud storage infrastructure. The Kindle Fire has 8GB of internal storage, and it backs up its contents to the cloud, using wireless Whispersync for books, movies and TV shows alike. “We feel the same way about syncing [as Apple],” Amazon CEO Jeff Bezos said at today’s press event in New York City. The device even syncs playback across devices for Amazon Prime users.

But more importantly, EC2 enables Amazon Silk, a cloud-accelerated browser that makes browsing the real Web possible on the device with its limited hardware specs. It uses Amazon’s cloud infrastructure to optimize Web content and push it to the device, and it observes user behavior and predictively loads pages for faster responses.

What isn’t the Kindle Fire?

For a while, it wasn’t clear that the rumored Amazon tablet would be be part of the Kindle brand at all. Then again, a lot of the details in this summer’s rumors, as covered in the Wall Street Journal, didn’t pan out. The WSJ reported that the tablet would have a “roughly nine-inch screen,” putting it in the same category as Apple’s iPad, but that’s not what Amazon released today. This is not a tablet in that category. It does include Amazon’s Appstore, and it can be used for email and Web browsing, but this is not a personal computer first and foremost. It’s a media device.

By the way, Ryan Block also reports that this isn’t the top-shelf Kindle Fire, even though it’s currently the only one. His sources say it’s just a “stopgap” version rushed out before the holidays, and there’s a better one coming out in Q1 of 2012. You might not want to buy this just yet.

Why does it matter?

With a full-color tablet leading the pack, the Kindle line is now a vertically-integrated media powerhouse. From the Kindles themselves to all the content you can stuff in them, it’s all available for sale directly from Amazon. The e-ink Kindles have become the definitive e-book readers, and now the Kindle brand can expand to music, video and games as well.

This, of course, is why Amazon can afford to price this tablet at $199. It’s a risky business, but a cheap, zero-margin tablet serves as a point of sale for the business Amazon has always been in: selling books, music and movies. Amazon redesigned its website earlier this month to focus on its digital wares, and it just announced a big content deal with FOX to add more streaming movies and TV shows for Amazon Prime members this fall. Amazon’s content offerings are primed and ready for the Kindle Fire.

Amazon’s On Demand premium streaming option had 100,000 titles available as of the middle of August. That included around 9,000 that could be streamed through a Prime membership. That was after Fox made deals with both NBC and CBS though before the Fox deal was announced.

Think of it this way. This is not a $199 tablet. The trial membership to Kindle Prime will be where Amazon is really making money on the tablet and the ecosystem. After the trial membership expires, most consumers will probably pay the $80 to renew Prime and all the benefits that go with it. Amazon is trying to wrangle a lucrative ecosystem in the same way that Apple has with iOS devices.

Amazon and Apple

People wanted this tablet to be an iPad competitor. The device itself is not that. It’s a different form factor and a different operating system with different priorities. But the Kindle line is certainly an Apple competitor. Just watch them wrangle over the Kindle app on iOS. Apple is vertically integrated in just the same way as Amazon; it sells its own devices as well as the software and content to put on them. Apple makes money from e-books, music, videos and games, too.

But iPads, iPhones and iPod Touches are designed to be multi-purpose. They’re meant for email, Web browsing and other PC-like tasks as well as media consumption. iOS devices are meant to be flexible so that the user can decide how to put them to work (or play). Apple’s business is built on selling powerful devices, not just the content. And while iOS devices are quite profitable for Apple, they’re expensive for consumers who just want a book-reading or movie-watching device.

The $500 iPad murdered the cheap desktop PC, but it leaves room underneath for less ambitious mobile gadgets. Amazon’s fleet of Kindles can exploit that opening by providing inexpensive devices designed specifically for media experiences. In doing so, Amazon can leverage its peerless media retail business and put the squeeze on iTunes.

The Kindle and The Nook

Amazon’s competition in the dedicated e-reader field is Barnes & Noble and its Nook. The New York Times reports that Amazon has 52% of the e-reader market, while Barnes & Noble has 21%. B&N has offered a 7-inch, Android-powered Nook Color since 2010, but the Kindle Fire beats it on specs.

However, as MG Siegler reported this week, Amazon’s release of the Kindle Fire today could still be a defensive move against Barnes & Noble. His sources say that the Nook Color 2 could be announced as soon as next month, and it will catch right up with the Fire as far as hardware.

Between the rush to ship something before the holidays and the Nook Color 2 breathing down its neck, Amazon had to squeeze this Kindle Fire out. One thing’s for sure: tablets are the new Tickle Me Elmo this holiday season.

Kindle Fire image via Bloomberg

What do you think of the Kindle Fire? Share your thoughts in the comments.