The first-generation Kindle Fire has a screen resolution of 1024-by-600 pixels. Now, that was perfectly fine eight months ago when Amazon's main competitors in the 7-inch market, including Barnes & Noble's Nook Tablet, had the same resolution. But the Nexus 7 features a 1280-by-800 display--and it costs the same as the Fire.
The 7-inch Toshiba Thrive is also 1280-by-800, but it starts at $380 and isn't a serious threat to the Fire at the low end of the tablet market. And don't forget about the 1280-by-800 T-Mobile Springboard, a 7-incher that costs $250 but also requires a data plan starting at $40 per month.
The Nexus 7 has set a new resolution baseline for 7-inch tablets priced at $200. It wouldn't be a shocker if the next Kindle Fire is 1280-by-800.