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It's also damn tiny for an e-reader. If Apple decided to do a little tablet thing with a larger screen... yes, they'd probably destroy any competition if they added ereader functionality and a decent store.. but an iphone? No.
See, some of us (and I'm not one of them) may be willing to use a palm device or iphone to read a book, but not most people. It's small, it's irritating to hold something like that and read for ages and ages (and I've used it in that way.) I LOVE my iPhone, and use it all the time for everything, but not books. It's not even the eInk thing, it's just the size. It's not efficient to read in those dimensions, the lines are too short, the page turns would be too frequent.
The reason the Kindle or the Sony Reader or Cybook or what-have-you are commercially viable is they recreate the reading experience, and over time we've worked out that the "paperback" size is just about right. Any smaller is too small, any bigger is unwieldy.
I think the iPhone at its new price point is going to shake a lot of industries, but I don't think books have a lot to worry about. Make the screen three times its current size and... well, that's another story all together. If Apple came out with a tablet-like touch device as expansive as the iphone but with a ebook feature and they had a decent book selection I'd toss my Kindle in a moment.
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