Looking at this, the annotation thing has a key component that screams to me that Kindle is doing this not so much to help libraries but to make sales. Amazon could be providing a large portion of the inventory for libraries, but lending might be such that you couldn't borrow again, thus forcing a person to buy the book to complete it. The comment with respect to storing the annotations suggests that users will always be able to have them if they choose to get a book again.
I'm just speculating, though. As it is, I wonder how library borrowing works with the EPubs and the cases where a reader might want to extend their due date. In the DTB world, I often extended a checkout date for books, especially non-fiction, guide type books that I found useful and there wasn't a demand for. Heck, I've had books non-stop for a year from a library at points (like when planning my wedding). My library never cared that I extended the due date and in other cases only stopped extensions because someone else wanted a copy of the book.
With ebooks, I know the supply is much smaller, and I am guessing stock will be limited to novels and basic non-fiction writing as opposed to the how-to type books I was describing before. Never-the-less, I am the type of reader who can take a month to read a novel as my job often distracts my reading. I know I'd find it annoying if a due date came up and I couldn't get the book again or had to wait in line months for it.... If it is a good enough book, I probably would end up buying it.
From a business standpoint, it probably is a smart move by Amazon although perhaps not ideal for the end-user in some aspects.
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