You've way over-specced your hypothetical device. Ipod isn't a general purpose palmtop! A book reader device should be as simple as could possibly work. Reads HTML, PDFs, DOCs and TXTs, displays on one black-and-white electronic-paper screen, and plugs into USB as a read/writable hard drive. No muss, no fuss.
I was just thinking about something like this, and I totally agree, the idea from the post is over spec-ed by a long way.
PDAs are going away since they seem to be doing too much. mobile phones are much the same while they are increasing in popularity most people complain about how complex they are.
For an ebook reader it needs to be so simple it _can't_ do other things.
It should be able to display txt, pdfs, rtf and (maybe) doc files. It doesn't do anything else. Maybe v2 might add a simple game, contacts/calendar type stuff. No stylus or other direct data entry for a while.
There could be a few sizes: paperback, trade paperback, hardcover and textbook. I don't know which one would be most popular but different sizes for different uses.
The real problem isn't the reader unit but the other end. We need an equivalent to the iTMS. I can see why Google didn't bother with asking permission first, its just too hard.
There must be a way to get the publishers to open up. We need a Steve Jobs to open them up.