The shorter Amanda Hocking story: wrote seventeen books in nine years and had all repeated rejected by the intermediaries of the conventional publishing world, put the books up for sale at competive prices in e-book marketplaces, and in a few months had sold a million and a half books and made herself a multi-million dollar pile of royalties.
As a quick money scheme. It isn't one. A two and a half million dollar reward for a decade of work is respectable (in the ballpark of what high end professionals in law, accounting, banking, medicine, dentistry, insurance sales, and car sales earn), but hardly the stuff dreams of unimaginable wealth are made of, and it came with an extreme risk of getting no reward from a huge up front investment compared to more traditional career paths.
Presumably, she is selling lots of books because lots of people think her books are worth spending $1 for the first in a series and $3 for subsequent books in a series, of which she receives a pretty big chunk as royalties. Price competition and low production costs help. But, if your work is crap, you can't sell a million and a half copies at any price.
So, the bigger question is really, why did the publishing world intermediaries fail to take her on until she had so phenomenonally proven herself? Of course, maybe they were all correct and made the right business decision. Maybe, while her work is O.K., it wouldn't have sold a million and a half copies, even at paperback pricing, without the wide expose she received from e-books.
Maybe, e-books will become the new minor league of book publishing in which the top performers get their ticket to the big leagues of hardcopy publishing, because predicting the next "it" author is inherently unpredictable. Maybe a big part of what adds value to established authors is buzz and timing, rather than the quality of their writing, and as a newbie whose timing previously hadn't been right, she had neither until her low price point and some buzz in the online community at just the right moments let her take off. Good reviews from early adopters can make or break any book.
Then again, it may very well be that the publishing industry intermediaries just screwed up with her, and maybe they screw up a lot, but nobody notices it because everyone in the industry has the same blind spots that systemically overlook some important and potentially profitable class of writers. There are only so many books that get published each years, there are far more submissions from wanna be authors with first published novels they are trying to sell, and the risk-reward matrix of publishing world gatekeepers may not match the optimal set of incentives to publish best selling profitable books. For example, there may be a systemic bias against all but the best genre fiction, in favor of "serious fiction" with less sales prospects, because serious fiction carries with it more prestige in the industry. Or, it may be something else.
It will be interesting to see how the e-book model changes the publishing world in the long run and whether they will learn lessons from the Amanda Hocking's of the world.