Yes, but the strategy makes sense. The fire is one of the top tablets after the iPad (right after the iPad, if I'm not mistaken), so with its success as a 7 in. tablet, it pretty much has a consumer go-ahead to compete directly with apple.
If they can pack decent hardware and aim around the same price as the original Kindle Fire than I can see Amazon dominating the entire tablet market until competitors strike back. When the Kindle Fire was released its specs were actually very generous for its price point. A updated version of the 7" for $200 and a 10.1" for $250 with updated specs would leave very little reason to buy anything else.
Amazon played this smart because even if profits are little or even a small loss on their hardware they have their own app store which they profit from. So unlike for Samsung for example after you buy their tablet they are pretty much done making money from you, Amazon however keeps you relying on them, buying apps, games, books and so on.