>...the home runs will get to market fast and cheap so they're a very big competitive threat.

Even among the sub-set of best-selling authors, first-time best-sellers are an extremely small minority. They simply won't represent a big enough chunk of the market to seriously threaten the traditional publishers.

>What will happen though is that some of them will be self-published and more importantly the mid-list will probably be taken over by self-publishers. So as a publisher your portfolio now has a higher percentage of decade-long bets and they have to pan out for you to stay in business.

Even if all first-time best-sellers go the self-publishing route, they are a small enough segment of best-sellers that their loss will not be crippling to traditional publishers. All but a very few mid-list authors also go through the same process of growing (except that they plateau before achieving best-seller status), so the traditional publishers won't lose many of them, either. Even if they did lose all of the mid-list authors, though, I don't think it would hurt the traditional publishers all that much because they don't really make much money from mid-list authors. Traditional publishing houses keep the mid-list authors onboard because they don't lose money, and because there is always a chance, however slim, that they might someday tranform into best-sellers. Limiting traditional publishers to nothing but decade-long bets won't really hurt them because that is already where all of their profits are concentrated. Mid-list authors are just a byproduct of a process designed to occasionally pop out a chart-topping superstar.

As self-publishing really takes hold, I think that the career path for a typical mid-list author will look something like this: Start out by selling a (mediocre, money-losing) first book to a traditional publisher. Show enough potential to get signed for a multi-book deal. Write enough books to fulfill the contract, never doing poorly enough to be cut loose early, but never making the best-seller list, either. After fulfilling the contract, transition to self-publishing. Losing a mid-list author to self-publishing won't really hurt the publishing company, but cutting out the middle-man will help the author immensely.

>So we do agree that prices will be pushed down?

Mean prices will almost certainly go down, but that doesn't mean that all prices will go down. I actually think that prices for best-sellers might very well go up: the center of the distribution will move towards lower prices, but the best-selling tail will stretch out far enough to more than make up for that shift.

>Can we at least agree that self-publishing is a long-term threat for publishing houses? You don't think it will wipe them out, I think that at least the existing ones will get replaced by new firms that understand the new dynamics better.

It depends on what you mean by "long-term threat." I agree that their profits will be reduced, but reduced profits are not inherently disruptive. Industries adapt to such changes all of the time, even ones that supposedly can't survive any further reduction in margins. Some of the traditional publishing companies will almost certainly fail to adapt and go out of business, but others will most likely adapt and survive, possibly even thrive in the new environment. The only thing that could completely destroy all of the traditional publishers would be if somebody else came along and provided the still-valuable service they currently provide, but more effectively and/or at lower cost.

I think that one possible business model would be incubator-style publishers: small teams of editors and marketers who "invest" in up-and-coming authors. A typical contract might be something along the lines of, "We will edit and market your first book. You will pay us x% of revenues from any book we edit and market for you. For the next n years, you will also pay us (x/2)% of revenues from any book we don't edit and market for you, unless you offered us the chance and we declined."