The Kindle Fire is going to compete nicely with the iPad at $199. However being an iPad Killer, is just wishful thinking. Being an iPad Competitor is probably more realistic.
Kindle Fire isn't a direct competitor. It's a device for consuming content from Amazon. Targeted mostly at existing Amazon customers.
Many Amazon Customer are Apple Customers as well. The Kindle Fire is definitely a direct competitor not only in hardware but also in digital goods (books, movies, and music).
It's at least as much of a competitor as any other 7" Android tablet.