That's exactly the logic Amazon uses for their Fire tablets. You can get them cheaper if you agree to have ads baked into the lock screen at a firmware level.
That seems fine to me.
And, to Amazon's credit, the ads are unobtrusive. You get an ad for another book on your lockscreen; not a big deal, and most importantly, you are never, ever interrupted once you've unlocked the device. If Amazon ever switched to an intrusive-ad model, I'd pitch the thing in the trash without a second thought.
I was able to get the latest Paperwhite, trading in the old, broken Kindle, for $58. If it lasts as long as my old one (8 years) I'll be fine with that. I don't use it often, I keep a lot of reference and old books (like Raymond Chandler), I stopped buying Kindle books after three consecutive books were missing the last chapter or so.
The kindle windows conversion program (Kindle preview 3) will handle nearly everything that the "email yourself a book @kindle.com" won't, and for everything else there's calibre.
I had a book and a couple of palm pilots and other portable LCD screened things over a decade ago, and the kindle is the best for the price I get them at.