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I was lucky, in that I had three novellas Hodder had turned down because they were in a different genre from my other books and too short to work as conventional paperbacks. But I realised they might work for the Kindle.
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This in my opinion is where e-publishing can be right for any author, big or small. I did something similar a while back and made a deal with a Canadian publisher to carry a short story/novella of mine. I just had the one, and I was considering doing a whole book of short stories based on the major character in this one. I figured that selling it as a digital download first might give me a good idea of how well it would be received and whether or not I should bother doing a whole book of these stories. I recently got out of the deal though because I couldn't come to terms about certain things with the publisher. I may just publish it myself.
I must say though, that this guy hit pay-dirt largely because he already had some books out with a traditional publisher and therefore, some readymade readers. I daresay it will be harder for the rest of us.
Also, this situation of self-publishing at the moment reminds me very much of the way most musicians have gone to independent labels. Even some of the most well-known musicians are rolling their own these days, and everybody has a home project studio in a spare room. But then again, musicians are making the vast majority of their money touring nowadays too.