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With the Kindle Fire HD, Amazon learns that a low-cost tablet doesn’t have to be cheap

Last year, Amazon (AMZN) turned the tablet market on its head by releasing the Kindle Fire, which featured a then-unthinkable $199 price tag and… not too much else. That’s not to say the Kindle Fire was a disaster in any way, it’s more that it was a low-price tablet in both name and in design that featured good-but-not-great hardware and that lacked key features such as a camera and a microphone. The Kindle Fire’s killer price point helped it move a lot of units over the holiday season, but its sales reportedly sank quickly once Apple (AAPL) released its new iPad in the spring.

Happily, though, it seems that Amazon has decided to up its game in a big way. Most importantly, the $299 version of the Fire HD features a Retina-like display that packs 1920 x 1200 pixels onto an 8.9-inch screen, or 254 pixels-per-inch. Amazon has also gone out of its way to ensure that the 8.9-inch Fire HD runs more smoothly than any other Android tablet released so far with a TI OMAP 4470 processor and two Wi-Fi antennas that both run on the 2.4GHz and 5GHz bands. The combination of the speedy new processor and the dual antennas have produced a tablet that Amazon says will provide “40% faster downloads and streaming compared to the next fastest tablet.” Oh, and for good measure Amazon threw in a front-facing HD camera and dual stereo speakers with Dolby Digital Plus audio as well.

Now, the addition of all this top-notch hardware raises an important question: What happened between last year and this year that compelled Amazon to so drastically upgrade its tablet line? After all, Amazon was mostly content last year to sell the tablet as a low-cost conduit for its online products and services, and now it’s releasing a tablet with a screen resolution that’s almost as strong as the new iPad. Why the dramatic shift?

Two important reasons come to mind: The quick drop off in Kindle Fire sales after last year’s holiday season and the success of Google’s (GOOG) Nexus 7 tablet. The quick sales drop off is an easy one to understand since Amazon soon discovered that people saw its first-generation Kindle Fire more as a stocking stuffer they’d pick up as a cheaper alternative to paying top dollar for the iPad. Sure, it sold a lot of units initially but it didn’t create the same sense of brand loyalty that Apple’s tablets created.

The Nexus 7, meanwhile, was an Android tablet that outclassed the original Fire in just about every conceivable way, on both the hardware side with its quad-core processor and on the software side with killer features such as Google Now. The Nexus 7 showed the tech world that a low-cost tablet could deliver a great experience while still implementing top-notch hardware, thus dramatically raising the baseline for what a tablet in the $200 to $300 price range should deliver to its users.

All of this is good news for Android tablet fans, who have had to wait a long time for a cheaper alternative to the iPad that didn’t provoke justified howls of laughter from smug Apple fans. And now with the Nexus 7 and the Kindle Fire HD, it seems they’ll have two. Game on.

Prior to joining BGR as News Editor, Brad Reed spent five years covering the wireless industry for Network World. His first smartphone was a BlackBerry but he has since become a loyal Android user.