Here's my friend's idea. Rather than switch to Epub entirely, he thinks Amazon could keep the Kindle format for internal use and then offer Epub as an on-demand option. This would let Amazon expand their market without having to cut off existing customers.
If Amazon did this, then they would be able to compete with B&N for Nook ebook customers. Given that B&N are credited with being the #2 ebookstore in the US, I bet Amazon are thinking about best to compete with them.
Sidenote: we know this model could work because Kobo are already using it.
The legacy ebooks could also be dealt with, but it would require some finesse. Amazon could always automate the conversion, but i think it would be better to encourage producers to go back and update their ebooks. Amazon would need provide some incentive (either carrot or stick). The carrot would be the value of expanding your potential market. Imagine all the new potential customers.
The other encouragement would be Amazon's 70% royalty option. Right now that option has a couple requirements (pricing, TTS enabled, etc). Amaozn might decide to add Epub as a requirement. That would generate a lot of ebooks, wouldn't it?
I still think the rumor is BS, but I have to admit that there's no technical objection to it.