One article explains how it works:
Novels are posted by members of cell phone community sites to be downloaded for free and read on other cell phones...The works are published in 70-word installments, or abbreviated chapters that are the ideal length to be read between shorter train stops. This means that, despite small cell phone screens, lots of white space is left for ease of reading. Multiple short lines of compressed sentences, mostly composed of fragmentary dialogue, are strung together with lots of cell phone-only symbols. The resulting works are emotional, fast-paced and highly visual, with an impact not unlike manga.
And another article says that some authors have gotten good book deals:
These days, books aren’t selling so well, but Keitai Shosetsu, which have low production and promotion costs, have managed to create mass appeal to thousands of readers. Ironically, when they’re bound and printed, Keitai Shosetsu often wind up on the best seller list. Major publishers are starting to acknowledge this new market and there are already 30 professional Keitai Shosetsu writers in Japan.
I also managed to find the Japanese Wikipedia article about keitai shosetsu, with a number of links to books and sites.
I wonder if they'll become popular in the US eventually, or if this is just a Japanese phenomenon.