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Many ebooks are actually substantially less expensive than their paper counterparts. E.g. a typical hardcover may be $15, whereas the ebook may be $10 or less (i.e. a 50% or higher price cut). Digital distribution is cheaper than printing paper, but it isn't free, as you now have conversion costs, servers, backup, huge and complicated databases, bandwidth, credit card processing, customer service, data management, and IT staff. Nor does digital eliminate the other costs of producing a book -- writer's advances, writer's royalties, editing, marketing, PR, accounting, retailer's cut, taxes, management to name a few.
The physical costs of a book are actually relatively small, around 15% or so. You are also overlooking the fact that you are no longer paying for shipping and handling -- a cost, by the way, that is actually a small revenue source for the retailer.
Most books, by the way, never make a profit; it's the blockbusters that really bring home the bacon, and essentially subsidize the other books.
Comparison an ebook to a digital movie rental is flawed. With a movie rental, you have access to the content for about 24 hours, at which time you lose your access. With the ebook, you are purchasing, not renting.
The model isn't "wrong," unless you mistakenly believe that digital products cost $0.01 to produce, or believe that writers and publishers do not deserve to be compensated and/or earn a profit from their works and the financial risks of their work.
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