If you look around the forums here, you'll notice many MR users have multiple e-readers or combinations of e-readers, tablets, smartphones, etc., and I'm sure nearly all of us have a laptop or desktop of some sort to go along with the mix. We live in a spoiled age!
I have a Galaxy 10.1 for roving reference at work, and I've discovered that I love e-reading on it (as compared to my dead and gone Coby) with the better screen resolution, as well as doing games and web browsing. I like checking my email on it and reading Google Reader, but I don't like writing email or doing blog posts on it. It is definitely a consumption device in my off hours (more inclined to grab it than my laptop), but it's a service device at work (I don't need to be at the reference desk to help you,).
Personally, I will purchase a 7-inch tablet for e-reading, video and web viewing, and some games (scrabble, boggle, solitaire, etc.). It's hard to argue that size as a productive device. It must have a high screen resolution for e-reading, I've discovered. My Borders closeout Kobo Wifi will be my gym e-reader - I don't want to be sweaty and touching the screen, and I can justify this luxury at the closeout price :-)
I agree, laptops and desktops are better at most productivity usage than tablets of whatever size. That's most. And so what? Nothing has to replace the other. We're at a gadget buffet with many options to fit different budgets. If someone wants to have a heard of expensive toys, that's fine. If someone wants a 7-inch tablet so they can e-reading and do web stuff without carrying another device around, more power to them.
I don't think we're going to see a whole market trend down to Fire and NC-like tablets. There will certainly be a defined split in the market between "whole" tablets and dedicated use tablets, and frankly, I would rather see this fork than "this is all we've got, so deal."