I haven't seen a Kindle up close, so I'm not going to comment on its dubious industrial design (at least not much). However, the fact that it looks like a medical instrument from 'Space: 1999' is irrelevant to the actual issues I believe will plague this device.
Issue 1: When was the last time you got on a plane or train and thought to yourself, "I wish I had 200 books to pass the time!" I'm guessing, never ever. An iPod for books is unnecessary, as we don't consume books passively in three minutes (Blogs are another matter, which I will touch upon shortly).
Similarly, the ability to shop for, and download a book, on the go via Whispernet will only be crucial for the most ADD among us. Nowadays, when I hear about or see a book I might be interested in, I pull out my BlackBerry write myself an email reminder to order it (from Amazon, of course) when I get back to my laptop. Rarely do I kick myself for not being able to consume that book right there, on the spot (Magazines are a different story, and these too will be dealt with shortly).
There's one common situation that I can imagine there being a benefit from having access to dozens of 'books' in portable form - being a schoolkid, taking a half dozen courses, each with a ponderous companion text.
(An uncommon situation would be traveling around the world purely via surface transportation, which would involve long weeks at sea on a freighter or multi-day rail trips traversing frozen wastelands- but there's only one person I know who has ever done the like, and she's a pretty small market).
Back to the schoolkid- so great, you have one portable device you can carry to read all your books on. Then, once you've finished your research, you...open your other portable device (a laptop) and write your assignment.
Since the schoolkid is going to be forced to carry a laptop anyway, which does everything the Kindle does (with a couple of ergonomic differences), do the supposed advantages of the Kindle make the extra device worth it?
The root of the problem is that book reading isn't passive enough to be relegated to a pocket sized device of inconsequential size and weight (like my nearly microscopic iPod Shuffle) nor is it primary enough to command its own obtrusive device. The incremental improvements it brings over reading a book on a laptop do not argue for a dedicated device for reading so much as point out some minor improvements that could make laptops more usable.
I think the Kindle service would be a great adjunct to a paperback sized laptop with a fold-back keyboard and a touch sensitive, high resolution screen. You could read your books, flipping the pages with a flick of your fingers, and when you needed to write your report (or check your email or pay some bills), the functionality would be there.
I do believe there is a market (and a use) for a dedicated e-reader. I've already opined that books are ill-suited for a dedicated portable device, especially one as expensive or feature-rich as the Kindle. Newspapers, magazines and books? That's another matter. The key is to diminish (or eliminate) the hardware cost and footprint.
I'm envisioning a device about 4"x 6"- the size of a typical snapshot. Ditch the bezel- make it all screen on the front with a flip cover. Give it enough memory to hold five books, or twenty magazines, or fifty daily newspapers. Yank out the wireless capability and the keyboard- give it an iPhone-style virtual keyboard for the rudimentary notes you might be taking- and require it to be dropped in a dock every night to recharge and receive updated subscription content. Grab it on the way out of the house and browse Time, Newsweek, the Times, etc. on the train, plane or automobile of your choice. Charge me $9.99 a month for an all-you-can eat periodicals subscription and the normal per-book charge. Give me the device for free or cheap with a three-year commitment.
Add a few extra gigs for MP3s and a decent music player and all of a sudden you have what sounds like an overgrown iPod Touch. Since Apple's already got non-Space:1999 style hardware designs for that, let them build the thing- and let Amazon's service fill it up. To me, that's the winner (and I bet, the eventual end game here).