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Option 2 is not only the more effective of the two, but as you pointed out, it is proven. My business model was my attempt at Option 2 (with mixed success, it may still stand some tweaking), and I'd recommend it over Option 1 every time.
The thing is, Option 2 means more work and lower profits per sale for the author/publisher, which makes it a harder sell to them, unless you can demonstrate that the method makes them more overall sales to make up for the lower margins. Until e-books really take off, that's also a hard sell.
That's why the Kindle system could succeed over all others: With Amazon doing the heavy lifting to create the system and the hardware, it's easier for a publisher to get on board. In fact, if they ever build a better Kindle (more attractive, and color), I'll get one, too.
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