Thanks for all these thoughts. A s a new digital publisher Haunted Computer Books, we believe in working-class prices (in fact, JA Konrath was my main inspiration). So $1.99 seems reasonable for our books. But we're also thinking ahead about how we might survive in the free-book era and exploring ad ideas, just because we right now have the ability to do it (or not do it) the way we want. One thing we'll try first is excerpts of our other books, discreetly tucked at the end of a book after it's clear the story is over. (After author bio, etc.) As links on ereaders and graphics get more sophisticated, we'll have to think about that, because I also do comics.
Yet our overriding philosophy is the ad must be content or entertainment, not just a sales pitch, and it will never interrupt the story. We all know how to tune out advertising. But an entertaining event that draws your eyeballs is worth your time, because you seek it out (like Super Bowl ads that get rejected and go on to YouTube fame). This field is totally in its infancy and it's great to be part of the shaping.
Scott Nicholson
Coming March 1: THE SKULL RING
ASHES
http://tiny.cc/BGihE
FLOWERS
http://tiny.cc/4jtUc
THE FIRST
http://tiny.cc/BcCL5
BURIAL TO FOLLOW
http://tiny.cc/WemOU