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Collections aren't folders in the conventional file system sense. Whilst you could argue it would make sense to allow the folder structure to dictate the collection creation, ie make a folder "novels" and place a file in it, and the kindle would have that book in a collection called "novels", it wouldn't handle the situation where one book can appear in multiple collections, you'd then need shortcuts to files, which starts to get messy.
Personally I'd prefer a full nested folder structure, but I guess they want to keep it simple.
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