Ads will appear on the device’s screen saver and show up as a banner on the homepage, but will not appear inside books.
It’s only a $25 savings from the normally-$139 Kindle 3. I’m sure they can find buyers for it, but at what cost to Amazon’s (and the Kindle’s) image?
I don’t think this is about ads: it’s about lowering the initial cost and making people pay the balance later. If anything, the ads only pay for the interest on the owed money.
I doubt Amazon will make serious money on these ads. They’re mostly there to annoy you into paying the $25 to remove them. And that’s why the difference is such a small (and “nice”) number: it’s small enough for somebody to just pay it at some later point. Lowering the price to $99 would make the later payment $40, which looks like a lot more, and is almost half the original price; so it appears to be a lot more.
That is also the reason why Amazon won’t give the Kindle away for free (like a lot of people have suggested): they don’t want the ads, they want people to buy it so they can pay the difference later. Nobody will pay $139 to remove ads from a free Kindle.