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I'm not as convinced as the rest of you. I think the public as a whole is really sold on the 'free' model. Make it free and I think the numbers will rise.
In the old days, search engines were ad free. Then we saw the Go.com and google and advertising in search results. With google in this game, I wouldn't be surprised to see a similar result.
As you are reading your book, the right column, just like Google, has ads relevant to the page you are on. Your characters are on a date in a skating rink, and in the right hand column is an ad for a skating rink local to you - click it to get discount tickets and/or a reservation. The 'hero' travels to vermont to follow up on a tip, and to the right is an add for a bed and breakfast in vermont. As they enjoy a tasty pancake breakfast with real maple syrup, you can order syrup direct from the manufacturer.
This would necessitate several changes in ebook readers. I wouldn't want them stealing my six inches of reading space, so the screen would need to add a one inch strip to the right (subsidized by Google/Amazon so it didn't cost me extra). This would only be cost effective for advertisers if they could really drive sales, and you would need interactivity -- click on the ad to order. This means faster response than eink, and online connectivity.
I know that most of you aren't in favor of this, but I do think free sells. Forget about how its always been done. The question is whether the mass market will support it. For free, or very low cost books I think it will.
Another version of this is that it may not even be for full length books. I agree that it would be tough to subsidize those to zero. How about short stories? Download a six 'page' short for free and it comes with margin ads. The truth is that I don't like short stories, but it might be a modern version of "Ellery Queen Mystery Magazine" or "Amazing Stories"
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