The eReader market is quickly changing from one dominated by a few monolithic competitors into a highly volatile playground for small market also-rans. Consider Plastic Logic’s Que. Originally slated to be positioned opposite the Kindle DX in Barnes & Noble stores, Plastic Logic recently released a press release saying it was still-born even before it was able to hit the market.

“We recognize the market has dramatically changed, and with the product delays we have experienced, it no longer make sense for us to move forward with our first generation electronic reading product,” said Plastic Logic CEO Richard Archuleta. “This was a hard decision, but is the best one for our company, our investors and our customers.”

While it resembles defeat in a way, this was a smart tactical move by Plastic Logic. The newspaper-sized eReader category, including the Kindle DX, has failed to gain much mass market acceptance. Users are more apt to expect an experience similar to Apple’s iPad from a device the size of the Que, replete with integrated multimedia elements and animated page turns. Devices sporting eInk technology are rapidly skewing cheaper and more portable, neither of which are the $649 8.5×11 inch Que’s forte.

Plastic Logic seems to be of the belief that their proprietary plastic electronics technology will carve out a niche for them when they do have a launch-ready product, but that remains to be seen.

Of course, while Plastic Logic is bowing out of the eReader race, albeit temporarily, the product category has seen the entrance of a new competitor: the Bambook, by China’s Shanda Literature company. While their approach to hardware appears fairly derivative, with a 6-inch display and Wi-Fi and 3G connections, their real game-changing twist is their approach to selling books.

While American eReaders continue to lean heavily on the big six domestic publishers for the content populating their devices, Shanda Literature utilizes direct relationships with many of their most promising authors. Their “cloud bookstore” offers just 10,000 books by traditional Chinese publishing houses, while playing host to the original published works of a whopping 1.1 million independent authors.

This is a revolutionary approach to selling the written word. In the Kindle bookstore, Amazon takes a 65 percent cut off the top, leaving just 35 percent of revenues for the publisher and author to squabble over. Meanwhile, Shanda Literature shares between 20 to 50 percent of their revenues directly with these independent authors. That democratic approach to revenue sharing is certain to make Amazon look like a money-grubbing corporation by contrast, should domestic authors ever get wind of this news.

Looked at together, this pair of stories underscores something very important about the eReader market. The key to the survival of entrants large and small is going to continue to be with innovation in the sales and distribution of eBooks themselves, not with hardware, which is made obsolete so quickly.

After lots of rumors and much speculation, Amazon has finally taken the wraps off the newest iteration of the Kindle, which we will colloquially call the Kindle 3. Styled in strikingly similar fashion to the new Kindle DX that Amazon only started selling this month, the Kindle 3 seems to represent the next logical step in the eReader niche. For Amazon, it’s an extraordinarily important step to re-securing their foothold in the face of an increasingly competitive market.

The Kindle 3’s list of features hits all the major selling points for eReader aficionados. It is 21 percent smaller in terms of surface area and 15 percent lighter, while retaining the same six-inch screen that Kindle 2 owners have come to know and love. Screen contrast has been improved by 50 percent, meaning that books should pop off the page a little more. The page-turn speed, which already compared favorably with Barnes & Noble’s Nook, has been improved by 20 percent. This increased screen refresh rate should also make the web browser and menu navigation that much better. They’ve also gone ahead and doubled the on-board storage from 2GB to 4, so you can now hold up to 3,500 books.

While all these changes have made an unquestionable improvement on the Kindle 2 experience, there are still a couple things missing. The absence of an SD card slot for expanding the on-board memory is a little baffling, though perhaps it would have gone against the general trend for slimming down the size. Amazon reported that their color e-Ink technology wasn’t far enough along to release at mass-market prices just yet, so readers will have to settle for black and white for the time being. Other than that though, there really isn’t a lot to complain about.

The biggest coup with the Kindle 3 announcement by far, however, was the price point. While the Kindle 3 will essentially replace the Kindle 2 at $189 with free 3G wireless internet service, Amazon has also introduced a new Kindle Wi-Fi model for just $139, undercutting the Wi-Fi version of Barnes & Noble’s Nook by $10 with newer hardware to boot. While the 3G service can definitely be handy in certain situations, it is by no means necessary for 99% of potential Kindle owners, and I’d expect the Wi-Fi model to quickly become the standard. They’re also offering both models in traditional Kindle white or the sexier new graphite finish, giving customers a little more choice.

While many in the media heralded the imminent death of the Kindle when Apple announced its iPad, it’s clear that the Kindle is here to stay. The iPad with its iBookstore makes for a passable eReader, based on my own experiences, but it’s no substitute for a dedicated device. With lawyers lining up to fire a class-action lawsuit at Apple because iPads overheat and shut down in direct sunlight, there is as yet a niche for Amazon to peddle their wares, even if it’s only beside the pool and at the beach.

With this new model and subsequent price drop, Amazon is finally starting to tickle the itchy impulse buy trigger-fingers of mainstream consumers. The traditional bargain point for impulse purchase electronics is at $99, but with they’ve gotten close enough with sexy enough hardware that it might just push many people over the edge. If you’re one of those considering jumping on-board, we heartily recommend it.

Kindle 3G (Free 3G + Wi-Fi, 6″)
Kindle (Wi-Fi, 6″)