The possibility that the peak of the spectral energy distribution (SED) of prompt GRB emission is produced on compact scales, prior to the acceleration of the fireball to its terminal Lorentz factor is considered. It is argued that if dissipation on these scales is associated with pair creation processes, then the observed clustering of SED peaks can be accounted for quite naturally by this mechanism. Further dissipation and processing of pairs and gamma rays at larger radii, can give rise to a nonthermal extension of the spectrum up to a rather high observed energy. If the nonthermal processes on these scales conserve the total flux of fireball quanta, then the SED peak, which is established on much smaller scales, will not be altered significantly. The asymptotic bulk Lorentz factor in this model should exceed several hundred.