First off, thanks to David for sharing the story on this. I actually read it through Publishers Weekly, but didn't think much about it til today.
Well, the first, and very obvious, answer to when a small advance is a good thing-- If you get a small advance and sell tons of books, you no longer have to worry about being in the hole with your publisher.
But the story I'd like to discuss deals with a new imprint blooming at Harpercollins. Robert Miller, founding publisher of Hyperion, is moving to HC and starting a studio that will focus on internet sales, offering little to no advances for authors, and no returns for book stores.
Why is this a good thing?
To start, he also wants to focus on shorter works, which I think might benefit authors who have amazing novellas. They say the novella is a dying breed (right along short stories), so imprints like this might serve to breathe new life into a format I really love.
They want to offer little to no advance, but the author's profit is going to be comparably higher (the article I read mentioned a possible 50/50 split on net profits). So, just as an example, let's say 1 hardcover makes a net profit of $10.00 (I use this figure just cuz it's easy to deal with). Would you rather get $1.00 (10%) or $5.00 (50%)?
This may translate into smaller initial print runs on a book, but I think smaller print runs will bring with it more opportunity for the first-time writer. The publisher would be more willing to take that risk on your first novel if they carry less risk of not making profit this way.
Finally, the focus on internet sales is a massive opportunity. More and more people are downloading e-books, and buying devices like the Kindle (heck, I'm pretty sure the Kindle's on a big back order these days).
So, while big advances are a nice, superdeeduper thing to have, imprints like this also raise a great opportunity. Of course, that's just my take on it. Read the article and decide for yourself what you think--