Steve... I take it you never spent much time on MP3.com.
Self-publishers already have the option to hire freelance editors and a whole range of services to get their books out there. This has been the case for years. What's different now is that everyone and their mother believes they can be an author (and/or that writing a book is a goldmine), and the slush pile has grown to epic proportions.
In fact, it's gotten so bad that most big publishers will no longer look at unsolicited manuscripts. They well know there's a chance they will miss the next Philip Roth, but the reality is that there is too much dreck, and it's too expensive just to wade through it in the first place.
Tell you what, spend 40 hours wading through Smashwords and/or Scribd, only reading books that were not previously published.
Assuming you find any, call up a freelance editor and ask how much they charge to polish up a 300 page manuscript. Then call a professional illustrator or photographer and ask them the cost for cover art; while you're at it, ask them if they know a professional graphic designer who can put it all together for you. Of
course you'll need a publicist and a national ad budget. It probably wouldn't hurt to hire someone to properly convert it into at least ePub, AZW and PDF.
Now, add up all those costs; my guess is it'll be around $20k not including marketing. I doubt many writers can afford this -- and if they can, why not just do it, list your book on Amazon DTP, and get 70% back per book?
And if someone's book really does take off that way, the publisher can sidle up to them, offer a nice advance, professional editors, national marketing, and other resources, and nab rights to the self-published books as well. It'll almost certainly cost less to cherry-pick the handful of winners from Smashwords than to sully their reputation by turning
into a massive slush pile producer like Smashwords.
Got another business plan handy?