One thing I think happened: they made phones to small. It was a great competitoin for awhile, whipping out a smaller phone than the next guy. But lots of them were too small to talk on, literally.
Now you're seeing a swing more toward the Treo/blackberry kind of thing. And once you start having the screen cover a whole side of the device, and with touchscreen controls... why get something smaller. Hell a CHECKBOOK is bigger than that.
Everybody uses the "I want to curl up with a book" line about ebooks, but is that where most reading gets done? Seems to me a lot gets done on pubic transportation (getting more popular in the New Scarcity Age) lunch hours, the beach and park, etc. Guy's on a subway for a half hour, he pulls out his phone and starts reading the latest Tom Clancey.
Guy across the aisle asks about the book, he zaps him the link. Etc.
You want to curl up on the couch, or concentrate, you plug in your glasses.
I've also seem some cool readers about the size of a passport, by the way. Little leather cover, open up to a screen with dial and touch selection.
Bottom line: why carry a book reader, camera, phone, recorder, music player when you can just have one. That's what the Blackberry already is, I think. I've seen some pretty cheap devices that do all that except the phone/internet.
And SOMEBODY is going to figure out it easier to just have a modified linux browser (like the portable apps Firefox, for instance) reading straight HTML than a specialized book reader.