I see at least one library is experimenting with Kindles. (Thanks, David Rothman at Teleread). I think XO's would be a much better durable choice. Kindles are a bit too fragile, IMHO, for library use.
Critically important, though, whatever readers are chosen, that libraries choose ebooks in formats that can be transferred from one device to another.
No reason not to at least use the .epub standard for ebooks today. This standard is an unenrypted XML format for reflowable digital books that theoretically should let users read books on any ebook reader. David tells us that mobipocket (which Kindles can read) is finally importing .epub, so Kindle owners can benefit. Commenters at his blog have mixed experiences with it so far.
Although I think the library's best bet is to stick with unencrypted public domain and creative commons licensed books, there may be some argument for experiment with best sellers and the like. This is where libraries should tread carefully, or we'll box ourselves into some bad corners if we buy books with DRM that only works on one device. Much as I am enamored with the Kindle right now, I don't realistically think that we know that it'll be the ticket 10 years from now, or even 2 years from now. Buying Kindle DRM'd books means you can only read the books on the Kindle (and other Kindles registered to the same account). Amazon should work with publishers and the IDPF to come up with an interoperable encryption standard, so libraries and users can buy books, then transfer them (yes, transfer, not duplicate) to other devices. That way, if a library buys fiction today, it can keep the books tomorrow.
Joe Wickert at Kindleville has a cool idea - unlimited content like Rhapsody offers for music. Now that's something a library could think about if the price is right! If it was at all comparable to rental collection pricing, that would be worth considering.
I suppose one could look at purchasing encrypted ebooks that only work on one particular device as if it were a rental. You'd have the use of the book for a while, much shorter than the time you could keep a physical book. The pricing would have to be quite low, but even then that would make me much more uncomfortable than a pure rental model. Why? I think because it would shift the rules of the game, leaving libraries in deep trouble when buying books that can't be read again and again without buying them again and again.