“The rumors are true,” Watson said in a Twitter post. “The team is in great hands.”

At Amazon, Watson will lead a group working on Kindle applications for various Amazon-made and non-Amazon devices.

Watson’s move was earlier reported by ZDNet’s Mary Jo Foley.

Update: Microsoft confirmed that Watson’s last day is Monday.

“Brandon did a great job helping us build a vibrant developer community and we wish him well with his next adventure,” a representative said in a statement.

Microsoft did not immediately say who would pick up Watson’s duties.

The videogame company’s stock has also been hammered by recent concerns about how well its new online blockbuster title Star Wars game is selling after launching in December.

In 2011, U.S. retail sales of new physical videogame content — including portable and console hardware, games and accessories — totaled $17.02 billion, an 8 percent decline over the $18.6 billion generated the year before, according to NPD.

Additionally, multiple reports indicate that while unit sales were up year over year in December, overall revenues suffered from steep discounting. Game retailers, such as GameStop and Amazon, both reported that holiday sales fell below expectations.

Electronic Arts’ third-quarter figures will be released today after the bell.

Its stock is trading down 12 cents, or .62 percent, to $18.46 a share. That has fallen significantly from its recent high of $25.20 back in November.

Back in October, the company said it was expecting third-quarter revenues of $1 billion to $1.1 billion and a loss per share of 77 cents to 63 cents. Excluding some stock-based compensation, acquisition-related expenses and other charges, the company said it is expecting a profit of 85 cents to 95 cents a share.

Analysts are expecting revenues of $1.61 billion and earnings per share of 93 cents.

The company also faced a setback when it announced that Barry Cottle, who was in charge of the company’s digital efforts, was leaving the company. Cottle took a job with Zynga, the company’s rival when it comes to talent and publishing games on Facebook.

And, while the industry is continually contracting on the hardware and physical retail front, one area of tremendous growth is digital.

At the time of Cottle’s departure, which was the third high-profile steal Zynga made over the past year, EA confirmed the company had achieved more than $1 billion in digital revenues in 2011.

Digital revenues include everything from downloadable content on consoles to social games, like the company’s hit The Sims Social, to the new release of Star Wars: The Old Republic, which is set to challenge Activision’s World of Warcraft game.

In the second quarter, EA said digital revenues were growing 30 percent year over year, and because of that, it was able to raise its full-year guidance.

Check back here to see if the company can deliver.

Amazon, which has a 31 percent stake in the second-largest daily deals company, released the figures as part of its quarterly filing today with the Securities & Exchange Commission.

It said LivingSocial’s 2011 net loss totaled $558 million on revenues of $245 million.

The footnote was first reported by Geekwire’s Todd Bishop this morning.

Chicago-based Groupon, which is the daily-deals leader, will report 2011 results next week. But based on its results for the nine months ended Sept. 30, it is still much larger. In the nine-month period, Groupon recorded a net loss of $238 million on revenues of $1.1 billion.

LivingSocial was always presumed to trail behind Groupon by a fair margin, but now we are able to see exactly how wide the gap is.

However, a source close to LivingSocial said the numbers reported by Amazon are somewhat deceiving. They do not reflect the full year of international results, including the results from some fairly large acquisitions, such as Ticket Monster in South Korea.

The source also said the losses are artificially high because of non-cash expenses, such as stock-based compensation, which soared as the company increased its employee base from 500 to 6,000 in the past year and made 11 acquisitions.

According to the source, the company’s gross bookings, which include both the merchants’ and LivingSocial’s take-home sales, totaled between $750 million and $800 million, not including some foreign investments.

In contrast, Groupon’s gross bookings for the first nine months of 2011 totaled $2.8 billion.

A LivingSocial spokesperson declined to comment.

LivingSocial’s operating expenses, which totaled $686 million for the full year, also reflect steep marketing costs that were incurred early on to acquire thousands of new users.

Groupon was criticized for making those same investments while it was going public.

In the filing, Amazon also revealed that the book value of its 31 percent stake in LivingSocial was set at $208 million, up from the $192 million reported in Amazon’s previous filing.

That implies that the company’s valuation increased over the past year. It is now presumed to be valued at somewhere between $4 billion and $5 billion. Groupon’s public market value is hovering around $13.5 billion.

Despite LivingSocial’s steep losses, the Washington, D.C.-based company is not running out of cash. In December, the company secured $176 million in new funding. The round, which could swell to as much as $400 million over time if new investors join in, is expected to be enough to delay the need for an initial public offering.

The comments follow a less than stellar fourth-quarter performance in which the gigantic e-commerce provider spent nearly as much money as it brought in the door — even during its busiest quarter of the year.

Profits for the quarter fell 58 percent, while annual earnings were cut nearly in half.

Some analysts were hoping that the end of the year would be a low point for margins and that Amazon would start growing in 2012 as it benefited from the steep investments made the prior year.

But that’s not part of the plan.

“We’re incredibly optimistic about the opportunity that we have, and that’s why we have invested the way we have and why we’re continuing to invest in the business,” said Amazon’s CFO Tom Szkutak in a conference call with analysts.

For clarity, Piper Jaffray analyst Charles Munster asked again: “So, your outlook in terms of investment philosophy hasn’t changed versus last quarter going forward?”

“No, no,” Szkutak said. “We are continuing to look as we always do. We learn every week, month and quarter about customer adoption. We are looking at a lot of positive things across the business in terms of adoption, specifically Kindle growth from a device standpoint and content that’s following that.”

Other categories seeing growth, he said, include clothing, consumables, consumer electronics and Amazon Web Services.

“There’s a lot of interesting opportunities that we continue to invest in. So we are pleased with the performance in Q4 and what it means going forward for us.”

Over the past year, Amazon has invested heavily in infrastructure, including 17 fulfillment centers around the globe. At the end of the year, it had 56,200 employees, up 67 percent year over year, with most of the hiring coming in operations and customer service.

It has also invested heavily in the digital content business, including the Kindle.

It’s widely assumed that Amazon is breaking even or taking a slight loss on the sale of each Kindle Fire. It’s also securing expensive partnerships with content companies across music, video and books, and giving some of that content away as part of the $80 Prime membership, which also includes free two-day shipping.

All of those are bets that Amazon is hoping will reap profits over the long term, as customers continue to consume after they purchase an e-reader or tablet or sign up for Prime.

So far, it’s too early to see how the investment is faring, especially when it comes to new categories.

“It’s very, very early,” Szkutak said, “but so far, we like what we see, so that’s why we are continuing down the path of adding more content and making Prime better. … Because we are investing a lot, we are making sure we understand it very well.”

A lot of details, like Kindle sales numbers, are still being kept under wraps, but he promised Amazon will someday share more about how it is doing.

Unfortunately, the market isn’t as patient. In after-hours trading, the stock was down almost 10 percent at one point. During the session, it ended up down, 8.7 percent, or nearly $17 , to close at $177.50 a share.

Coliloquy, a start-up demoing at D: Dive into Media, is running with that idea, in the hopes of creating a new kind of fiction-reading experience, built on the Amazon Kindle developer platform.

Books released using Coliloquy are written by authors but are released as “active applications,” rather than as e-books with a fixed set of pages.

For the reader, that means the books can be changed and updated over time, just like apps.

Serialized stories, like those that used to appear regularly in magazines, are just the beginning.

In some stories, readers have the option of selecting desired traits in the characters, which are then automatically woven into their version of the story.

In other words, your Fabio can be a brunet.

Romantic fiction aside, Coliloquy’s platform offer authors the ability to adjust stories based on feedback from readers — something previously sequestered in the nerdiest of fan-fiction forums.

Coliloquy stories are already available, but the demo at D: Dive Into Media showcased early-user data and the company’s first contemporary novel, as well as a new, personalized Erotica series.

We can’t wait to see what they’ve added to the conference swag bags.

The company earned $177 million, or 38 cents a share, on revenue of $17.43 billion.

Even though revenue was up 35 percent compared to the year-ago period, it fell short of Wall Street estimates. Fueling the bad news, Amazon also said net income fell 58 percent.

Amazon’s stock tumbled in after-hours trading, falling nearly 10 percent, or $19 a share, to $175.50. The stock recovered a tiny bit later in the session, trading down 8.8 percent.

Analysts had expected Amazon to report sales of $18.3 billion, up more than 40 percent from the fourth quarter in 2010, according to FactSet Research.

For the full year 2011, the company’s sales increased 41 percent to 48.1 billion, while net income fell 45 percent to $631 million, or $1.37 a share.

The Seattle-based e-commerce company, which is notorious for offering little insight into its results, did not stray from standard operating procedure. It’s still unclear how many Kindles and how many Fire tablets it is selling.

“We are grateful to the millions of customers who purchased the Kindle Fire and Kindle e-reader devices this holiday season, making Kindle our bestselling product across both the U.S. and Europe,” said Jeff Bezos, CEO of Amazon.com, in a statement.

But it did not get any more detailed than “millions.” The company added that during the nine-week holiday period ended Dec. 31, Kindle sales — including the Fire — increased 177 percent over the same period last year. Furthermore, the Fire was Amazon’s most-gifted and most-wished-for product.

The big wild card for the quarter was not supposed to be revenue, but margins. The low margins of the Fire, and the company’s gigantic investments in infrastructure spending, such as warehouses, were expected to weigh down earnings.

Analysts were estimating that Amazon’s operating margin would fall to 1.3 percent from 3.6 percent last year.

Sure enough, the company’s margins were down, but it wasn’t quite as bad as people thought it would be. Actual operating margin for worldwide sales during the quarter fell to 1.5 percent.

Many investors were hopeful that some of those investments would wane in the first quarter, as Amazon started to reap the profits. However, the company’s first-quarter guidance is also less than expected.

Net sales are expected to be between $12 billion and $13.4 billion, representing year-over-year growth of 22 percent to 36 percent. Amazon is also expecting an operating loss of $200 million to a profit of $100 million, suggesting that heavy investments could continue.

NOTES FROM THE EARNINGS CALL

• After a riveting rundown of the company’s balance sheet and income statement, Amazon is opening up the call for questions.
• First question everyone wants the answer to: Can you talk about Kindle hardware units? A non-answer: “The only thing I can help you with is the holiday season — unit sales nearly tripled with Kindle and Kindle Fire, so we are very pleased with the growth we have,” says CFO Tom Szkutak.
• In North America, Amazon saw strong growth in digital media, for books, video and music. “All of those grew really well,” Szkutak says, but he said that most notably the videogame category, including consoles and games, was up in terms of unit volume, but down in terms of revenue.
• Another media area that grew was physical books, which were up double digits in the fourth quarter year over year. “We are very pleased, considering the shift to digital content and the rapid growth of the Kindle.”
• Seventeen fulfillment centers were built in 2011, and more are coming in 2012, but no precise numbers yet.
• In Q4, the company had 56,200 employees, up 67 percent year over year. “The majority of those increases is in operations and the customer service area. It supports a lot of the growth, and you are seeing that in our operating costs. Certainly you’ll see that over time go in cycles, but we are feeding the growth we are seeing.”
• A question about whether Amazon will slow down its level of investment. “No. No. We learn every week, month and quarter about customer adoption, and we are looking at a lot of positive things across the business, including Kindle growth from the device standpoint, and the content that’s following that,” Szkutak says. “We are seeing strong growth in categories like soft lines, like clothing, and in consumables, and very good growth outside of the supply-constrained areas in consumer electronics. … There’s a lot of interesting opportunities to invest in, and we are pleased with the performance in Q4 and what it means going forward for us.”
• Will investments continue in Amazon Prime? “We are investing a lot there, and we are making sure we understand it very well. We’ll continue to monitor it very closely, and over time, we’ll be sharing more about how we are doing there.”

Asked about last year’s failed Hulu sales effort and expectations he would move on, Kilar said he sees “many winners” among Hulu and competitors like YouTube, Netflix, Amazon and Apple. “Online video and online video advertising are enormous,” he said.

Last year’s aborted sales effort, Kilar said, was “far more public than I would have liked. I’m a private guy.” Is he surprised he’s still at Hulu? “I’m not.”

Will he be leaving Hulu any time soon? Kilar urged watchers to look at his history, which includes two employers — Amazon and Hulu — since graduating school. “I’m not the kind of guy who dabbles in a lot of things,” he said. “Just judge me on my history, and the team on the history.”

As for the economics of Hulu, Kilar noted (as he has before) that the company made $420 million last year, which was 60 percent more than 2010, but less than the company had expected after a “soft” third quarter.

Hulu Plus, which Kilar described as being in “investment mode,” pays content owners more per user per month than any of its competitors, Kilar said. “The dollars going back to content owners on Hulu Plus are extremely generous.”

Kilar downplayed content negotiations with News Corp., NBC and Disney, the large media companies who own significant parts of Hulu. “Keep in mind we have 330 content partners, three of which we have an equity relationship with,” he said. (News Corp. also owns this Web site.)

So well, in fact, that the tablet market is often characterized as being a two-horse race between the tricked-out Amazon e-reader and Apple’s iPad.

But when it comes down to the numbers, the two companies couldn’t be more different, like comparing Apples to oranges.

Tomorrow, Amazon is expected to report a giant fourth quarter, but it’s guaranteed not to look anything like Apple’s monstrous results reported last week for the same period.

Here’s one data point: For the holiday period, Apple’s gross margin was an impressive 44.7 percent, up from 38.5 percent a year earlier. Meanwhile, analysts are estimating that Amazon’s operating margin will fall to 1.3 percent from 3.6 percent last year.

The specifications of the two tablets can be compared side by side, but a completely different vocabulary is needed to speak intelligently about the two businesses. Simply put, Apple is a hardware maker and Amazon is a retailer.

One has very high margins and the other doesn’t, resulting in two drastically different financial outcomes today. But over time, the idea is for that to change.

Rather than making money from hardware sales, Amazon’s approach to the Fire is to generate incremental sales from other goods and services on the device. Some analysts feel that, over time, that play can create a reliable and recurring revenue stream – and ultimately higher margins.

Tomorrow, Amazon is expected to report sales of $18.3 billion in the fourth quarter, up more than 40 percent from the same period in 2010, according to FactSet Research. Q4 earnings are expected to fall notably to 17 cents a share from 91 cents a year ago.

While revenue growth is impressive, the company’s profitability is being weighed down by losses from the $199 Kindle (which is not quite a break-even proposition), the construction of more warehouses across the globe (17 were added in 2011 for a total of 69) and other investments in infrastructure, like its cloud-computing services and media services, like video, music and e-books.

In contrast, Apple has a rich markup on its iDevices and doesn’t have much of the same overhead as Amazon.

Still, the number of consumers Amazon touches in just one quarter is staggering, and it continues to take share from brick and mortar retailers.

As J.P. Morgan analyst Douglas Anmuth points out in a report, e-commerce grew about 15 percent in Q4 in the U.S. due to strong holiday sales, but he expects Amazon’s growth rate to more than double that to 47 percent year over year.

Anmuth is also bullish that while the fourth quarter could represent a “low point for margins,” Amazon could start seeing an uptick in margin as soon as the first quarter, now that a number of services and some key infrastructure are set in place.

However, don’t expect much insight tomorrow into the company’s long-range plans. The Seattle-based company is typically short on details during its earnings release and call.

If it follows standard protocol, it could provide an update on warehouses being built next year, number of employees and other infrastructure investments, but will likely dodge answers about how many Kindles it shipped during the quarter, or how much Kindle Fire owners are purchasing on the devices.

For now, we’ll have to settle for analyst estimates.

On Sunday evening, Stifel Nicolaus analyst Jordan Rohan raised his estimate for fourth-quarter Fire sales to six million units from five million.

While only on the market for a limited time, that’s still a lot less than Apple, which sold 15.43 million iPads, up 111 percent year over year.

Amazon’s stock dropped 1.65 percent, or $3.22, today to close at $192.15 a share.

That’s where SnagFilms comes in. The start-up has distribution rights to more than 3,000 indie movies, which it shoots out to platforms like Netflix and Hulu. The four-year-old company is best known for the documentaries it puts out, like “Casino Jack,” the story of the disgraced political fundraiser Jack Abramoff; others include “Super Size Me” and “Enron: The Smartest Guys in the Room.”

Now SnagFilms has raised another $7 million, following up a $10 million round from a year ago. Earlier investors like Ted Leonsis, New Enterprise Associates and Comcast have re-upped; new investors include Terry Semel, the former Warner Bros. studio and Yahoo boss.

SnagFilms started out by asking bloggers and other Web site operators to embed its films on their sites for free. It made money by selling ads against the films and sharing revenue with the movie owners.

It still does that, but it has expanded to offer free movies on other platforms, like the iPad and Android tablets. It has also started making its movies available on pay-per-view outlets like Apple, Amazon and Comcast’s video-on-demand channels. CEO Rick Allen says that by the end of the year, revenue from transactions will eclipse the company’s ad dollars.

The interesting question for SnagFilms — and a whole lot of digital video companies right now — is whether there’s a way to get consumers to identify and value what distributors do. If they do, then these guys can build lots of value, as consumers learn to trust them as a good source for small, quirky films the big guys missed.

(Image courtesy of Shutterstock/James Steidl)

According to Rohan, the Fire is selling very, very well. So well, in fact, that on Sunday evening he raised his estimate for fourth-quarter Fire sales to six million units from five million, proclaiming the device a true tablet market contender.

“Kindle Fire has staked out an important market position due to its loyal Amazon customer base and attractive (low) device pricing,” Rohan said in a note to clients. “We believe the lower hardware price will correlate with high e-book and video content attach rates.”

In other words, there’s some serious potential upside to be had in incremental e-commerce spending via the Fire, and Amazon’s aim is to milk it for all it’s worth.

“We believe that software attach rates correlate inversely with the hardware price. From Amazon’s perspective, this could drive real upside in its North American media segment revenues,” Rohan concludes. “From a cost perspective, the shift to digital delivery of content could help Amazon avoid costly free shipping subsidies. Hence, we believe there is a great deal more to the Kindle device strategy than most have discounted.”

Rakuten is set on challenging Amazon’s global dominance by appealing to the third-party merchants Amazon works with today and by growing it’s digital content business to compete with the Kindle.

We recently learned about the company’s strategy through the eyes of Neel Grover, the CEO of Buy.com, Rakuten’s online shopping subsidiary in the U.S.

For now, Rakuten is admittedly Amazon’s much smaller competitor, though it is dominant in Japan.

The publicly held company is worth $14.5 billion compared to Amazon’s $85 billion market capitalization, and it pales in comparison to Amazon’s mass in the U.S. Buy.com is ranked 410th here versus Amazon’s sixth-place standing, according to Compete.

But Grover said Rakuten has a two-part plan for going up against Amazon.

First, it will target and partner with third-party resellers and merchants.

Amazon does this, too, but often ends up competing with the merchants because it has its own warehouses and products that it is selling, he said.

“Oftentimes Amazon will compete with the retailer. [Third-party merchants] teach Amazon what to buy and sell, which is ultimately not good for the merchant,” he said.

Rakuten, on the other hand, does not own any warehouses or any inventory itself and instead gives retailers — brick and mortar or e-commerce — the tools and traffic to support their own businesses.

In May 2010, Rakuten acquired Buy.com.

“I sought out Rakuten. … I thought their model was one that would give us a unique differentiator in the U.S. and we could learn and bring their model to our site and customers,” Grover said. “We are still in the final stages of transforming, and it’s taken a bit of time to get it transformed.”

But, he confidently added, “It will win out in the long-term.”

A similar approach is being taken by eBay, another e-commerce giant in the U.S.

The second part of Rakuten’s plan is to go after Amazon’s growing digital business, spanning music, e-books and other content.

In November, the Japanese company purchased Kobo, a runner-up in the e-reader race behind the Kindle and Barnes & Noble’s Nook. It paid $315 million in cash for the Canadian company.

Rakuten is banking on the Kobo in assisting with its move into providing downloadable media to consumers, starting with e-books.

At the time of the acquisition, Kobo CEO Michael Serbinis told All Things D that Rakuten will give Kobo the financial backing to grow internationally, as well as compete in the U.S.

“The U.S. is absolutely important. It’s fundamental. We have millions of U.S. users today, and we plan to grow that substantially, and internationally it represents a big opportunity as well,” he said.

Earlier this month, Buy.com started linking to Kobo from its site, so that consumers have the option of buying a physical copy of a book or a digital version. Other integration efforts are also under way.

It also wants to get into other digital content, like music. Back in 1999, Buy.com was one of the original sites to have a digital music store, but Grover said it was a pretty poor experience because of all the restrictions that record labels were mandating. A lot of that has now changed.

“We are definitely looking as a group at all digital content. … We are looking at different solutions, but today we have not continued on with our initial music store,” he said.

As with Kobo and Buy.com, acquisitions are always an option, he said.

“We’ll continue to look at everything that would make our business better. It hasn’t been shy over the past two years. We have a global vision to create an e-commerce marketplace offering all goods, and we continue to see that grow.”

And going up against Amazon, some serious growth is what Rakuten and Buy.com will need.

Gupta joined the company 18 months ago after Google acquired Jambool, a virtual goods payment platform where he was a founder and CEO. More recently, he’d been one of the leaders on the payments team, overseeing Google Wallet and reporting to Osama Bedier, Google’s VP of Payments.

“I can confirm that Vikas has left Google and we wish him all the best in his future endeavors,” a spokesman said.

Jambool’s product, Social Gold, was rolled into Google’s payment products and is being used for in-app purchases on both Android Market and Google+ Games.

According to Gupta’s LinkedIn page, he joined Google in August 2010 and held the title of head of consumer payments. Jambool reportedly was purchased for $55 million before any additional earn-outs. Prior to founding Jambool, Gupta worked at Amazon.

Gupta’s departure is the second management move made in the Google Wallet ranks over the past week.

A spokesperson declined to say if the division was undergoing a wider restructuring, but last week, I reported that Google’s VP of Commerce Stephanie Tilenius was moving into a more global position. And, as part of that, Bedier will be taking on a larger role within Google Wallet, though his title will not be changing.

The Wallet is Google’s mobile payments strategy that allows users to tap their phone at the register to pay using near field communication technology. The company has already successfully formed alliances with both banks and retailers, and is leveraging its vast install base of Android users.

Today, it is live with some merchants, although it does face some challenges.

Currently, it only works on one phone from Sprint, and both consumers and merchants will most likely have to upgrade their hardware for it to work. Additionally, some carriers, such as Verizon Wireless, have decided to disable Google Wallet on phones they are shipping. Other carriers, which are part of a mobile wallet joint venture called ISIS, are expected to follow suit, effectively limiting access for many U.S. consumers.

More than six months after hosting a flashy launch event, the business may be getting a lot harder than it originally looked.

Much of what we saw at CES relates to things we’ll be seeing 24 months out. In my mind, it’s all good: we’ll be able to target better, we’ll be able to segment better. The ads will be delivered on screens that are sharper, look better, larger, which ultimately provides more effective communication. There’s one last element: in the role that we [media buyers] play, we have a responsibility to ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business, doesn’t destroy the content amortization business, isn’t disruptive simply for the sake of being disruptive.

If it does alter the supply-and-demand equation, it needs to do so positively, not negatively. When you have the share of the deal volume that we do, you can’t just be passive about it. You have to try and influence it. The technologies and devices that begin to get manifested at a trade show like this needs to be guided, so that it all works out in the best interests of our clients.

– Irwin Gotlieb, Global CEO, GroupM; originally appeared at TVExchanger

We have a responsibility to ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business.

A bold statement and, it seems, a common mindset for many incumbent business giants in their respective industries; a mistaken belief that they can somehow coax disrupting forces (be they new companies, or larger macro consumer trends) into conforming to their legacy business models and cost structures. As we have seen countless times, the actions of incumbents when faced with technology disruption often is to turn to litigation, legislation or other non-market strategies (i.e., anti-trust investigations, artificial price barriers) in an attempt to delay or block the challenging technology or companies. This perhaps works as a delaying tactic in the short term (Rio MP3 player case, Napster, book publishing agency pricing model with Amazon) but fails in the long term.

Mr. Gotlieb’s apparent belief that he and other advertising agency leaders can “ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business” is futile in the long run, but perhaps more pernicious is the implicit arrogance of thinking the market force of the Web can be channeled into their bank accounts by sheer force of will. Of the many problems with this way of thinking, paramount is the ability to rationalize away making the hard choices and decisive actions to ensure the GroupMs of the world play a vital role in the new economy as they have done in the legacy one. (Cue Scotty from Star Trek… “You cannot change the laws of physics.”) For GroupM and other incumbents, it’s difficult to fathom, given how entrenched and advantaged they are, that they could drop the ball. But many will, as history has so often shown in times of market transformation.

Technology forces that bring greater efficiency and transparency to markets simply don’t care about privilege, access and rolodexes. They disrupt predecessor markets because of structural problems like price opacity and false scarcity that no longer “work” in the new market. Look at Google: its entire approach to advertising is to remove the middleman — just as, increasingly, the media-buying side of traditional agencies is reliant on the inefficient middleman, marketing up the cost of media to provide their services. Google is now selling $40B of media every year, the majority of it without a middleman (or at least with a different sort of middleman, and in any case, getting far lower margins than in traditional media bought by agencies.)

We watched as the music industry delayed its demise by suing Rio, Napster and literally hundreds of others, delaying the adoption of new business models not based on scarcity. We listen to Jeff Bewkes decry Netflix as the Albanian Army, as he feverishly works to reduce its influence with his content. We observe the movie industry fight with everything it has to protect the windowing strategy and defend limited access to content instead of moving toward open and immediate paid access to their movies. (Fantastic post on this from Rich Greenfield here, “Innovate Don’t Legislate” — registration required.)

And, as a microcosm of this larger conversation, we watched, over a very short period of time in the SOPA/PIPA debate, as the Web demonstrated the disruptive advantages of network effects and scale, as over a period of weeks, legislation that appeared all but ratified was shuttered, up to and including an implied Presidential veto.

Heady stuff. Granted, if we extend the metaphor and use SOPA/PIPA as a microscope, there are extremes on both sides, and it will be messy and require compromise if the big media incumbents and new technology disruptors are to learn how to co-exist. For big media companies and the service businesses that cater to them, this means recognizing the practical realities of changed business models — probably for the most part that their cost of production needs to drop dramatically and they need fundamentally to re-think distribution and customer relationship management to remain profitable and relevant.

On the tech side, it means recognizing that progress requires some level of institutional engagement and political compromise — because like it or not, this is the way our system of government works and how laws get written. This won’t be easy or natural, as it’s anathema to the culture of how new media tech and the start-ups that encompass it conceptualize and operate in our worlds. Facing reality and then demonstrating a bit more collaboration and compromise, however, would go a long way and be better for the customers who, like our democracy, these industries ultimately serve. Because it’s the customers who are in the driver’s seat, and increasingly they know it.

Perhaps it’s pollyanna-ish, but I bet on technology. Big media has the most to lose, because after decades of the game being rigged in its favor, the tables are turning. Of course it’s difficult and painful for media incumbents to embrace digital markets, considering these markets ultimately are smaller and have less attractive economics. That’s presumably why big media executives are so well compensated — if it were easy, anyone could do it. The alternative, however, is to be disrupted by new entrants that don’t have any allegiance to aging business models, and couldn’t care less how out of whack someone else’s cost structure is.

Coming back to Mr. Gotlieb’s view, I offer these thoughts. First, incumbents won’t be able to meaningfully guide the technology juggernaut of more efficient advertising mechanisms, so it’s perhaps better for them to focus their energies and advantages toward thoughtful reinvention. New technologies are bringing actual measurable performance and more efficient means of buying to a large share of advertisers. The challenge for incumbents is to adapt their enterprises to embrace this chaos and profit from it. The good news is, it’s doable. However, to think they can bluster their way out of this disruption is a fool’s errand.

David Pakman has been an internet digital media entrepreneur since 1997. He co-founded the Apple Music Group in 1995, worked at N2K (one of the first online music companies), co-founded MyPlay (pioneer of digital music locker), and was COO/CEO of eMusic for five years. Pakman is now a Partner at Venrock in NYC, investing in early stage internet and digital media companies.

Asked about the Fire during an earnings call on Tuesday, Cook essentially dismissed it as a competitor.

“I looked at the data, particularly in the U.S., on a weekly basis after the Kindle Fire launch,” Cook said. “I wouldn’t say that there was an obvious effect on the numbers, plus or minus.”

So the Fire hasn’t harmed the iPad. And it hasn’t helped it by fostering additional interest in it. And as for the rest of those lower-priced tablet competitors, Cook is confident they’re not a threat to Apple’s tablet supremacy, either.

“I think people really want to do multiple things with their tablets, so we don’t see these limited-function tablets and e-readers as being in the same category as iPad,” he said. “They might sell a fair number of units, but we don’t think people who want an iPad will settle for a limited-function device.”

A gloating remark there, but recent history supports it. Apple did sell 15.43 million iPads in its first quarter, and analysts expect it to dominate the tablet market for the forseeable future.

Cook expects that, as well.

“Last year was supposed to be the year of the tablet, and I think most people would agree it was the year of the iPad for the second year in a row,” said Cook. “We’re going to continue to innovate like crazy in this area, and continue to compete with anyone that is currently shipping tablets, or that might enter in the future.”

Not a whole lot, except they’re all featured users on Mulu.me, a Pinterest-like e-commerce site that helps users generate money for their favorite causes.

The site opens to the public today, after having been in beta mode since early December.

Mulu.me, which was created by San Francisco-based entrepreneur Amaryllis Fox, is an online retail space through which “regular” people, retailers and more recognizable names can recommend Web pages — whether a YouTube video, a link to an item of clothing, even a pair of airline tickets — all for the purpose of driving purchases. On their profiles, users can identify charities for which they’re raising money.

Here’s how it works: Mulu generates revenue from affiliate program fees, then splits it with the “curator,” and the curator decides what percentage of that goes to his or her charity of choice.

So if a Mulu user were to drive a buyer to a product available on Amazon.com, Mulu would get a cut of that purchase — 4 percent to 8 percent — of which the person who originally posted the product would get a revenue share of 2 percent to 4 percent.

Ultimately, this can leave little left over for charity — and there’s no mandate saying users have to give to one — but for some, tying buying to a cause is a motivating factor.

One thing that sets Mulu apart from other curation sites, or even a site like Pinterest, is its question-and-answer element. Users can post a question to the boards, just as they would an image, Web site link or video, and receive answers from other Mulu members.

Around New Year’s Eve, for example, I asked for recommendations about affordable but good champagnes, and received two answers (from people I didn’t know) from the Mulu community. The answers were helpful; what wasn’t as helpful was that the subsequent email notifications simply said I had received an answer, but didn’t include any other content. This is great for Mulu, as it drives people back to the site to see what the answers are, but it can be irksome for users. The company says it is considering changing the notification system.

Aside from a few other features that set Mulu apart — its curator “guru points,” for instance — the site works a bit like OpenSky, an e-commerce site that features celebrities as curators and splits the gross profits with them. OpenSky, which launched in 2009, started out as an e-commerce platform for bloggers, but gained little traction; the company later changed its direction and became a straight shopping site, with “influencers” pushing the products (OpenSky holds inventory; Mulu does not). It’s a newish twist on e-commerce that challenges the traditional recommendation systems.

“It’s not like an Amazon.com or Best Buy recommendation for a digital camera — it’s a professional photographer’s recommendation for a camera,” Fox said. “We’re moving toward a grassroots curation of product discovery online.”

Mulu.me is fun to browse and slightly addictive, regardless of whether the stream is filled with famous people, friends or people you might not even know.

The company is planning a more formal launch around the SXSW Interactive festival in March, which will also include the introduction of a Mulu iPhone app.

Also, it helps if they can’t steal it.

That’s the takeaway from a new survey from the IFPI, the music industry’s global trade group. It says global digital music sales grew 8 percent last year; that’s the first time that growth rate has increased since 2004, when the IFPI started tracking the statistic.

A good chunk of that increase may have come from subscription music services like Spotify and Deezer. The IFPI says subscription services have 13 million paying users, up from eight million last year.* There are also smaller increases in sales at more conventional outlets like Apple and Amazon, which generate much more revenue for the industry overall.

And while digital music sales still make up a minority of the music industry’s revenue worldwide, they are increasingly important: They now account for 32 percent of sales, up from 29 percent last year. (In the U.S., digital just edged physical last year, for the first time.)

All of which sounds fairly straightforward. But the IFPI is a trade group; it wants to hammer at one of its key points, which is that piracy is a big problem for the industry, which has seen sales cut in half since the Napster era. It figures more than a quarter of all Web users “access unauthorized services on a monthly basis.”

So, if piracy is a problem, why are sales increasing? In part, the trade group argues, because of anti-piracy legislation and industry moves.

The report highlights France’s “three strikes” rule, which allows the government to fine pirates and take away their Internet access. It cites a study arguing that French iTunes sales have increased more than 20 percent because of the policy, and the suggestion is clear: This would be a good idea worldwide.

The IFPI, which has singled out Google for criticism in the past, once again complains that the search engine makes it too easy to find illegal stuff. It also clearly went to the printer before the weekend, because its report refers to SOPA/PIPA as works in progress that are “set to be debated further in early 2012.”

*That number sounds several million high to me, but perhaps my rough estimate is missing a couple of big players.

After the departure of top Yahoo advertising sales exec Seth Dallaire, who decamped to Amazon this week, Yahoo did a little reorganization of its U.S. sales team.

(I promise to stop with the LOLcat images after this one for a while, but it is purrfect.)

Rather than go into the deets, you can just read the internal memo on it from Wayne Powers, SVP of advertising sales for North America:

Team:

These first few weeks of the year have been a phenomenal showing of Yahoo! pride and a clear display of the opportunities we’re poised to capitalize on this year.

In discussions with executives from our 100+ meetings with some of our largest advertisers, agencies, and holding companies at CES, it’s clear we’re changing the dialogue by having a consistent go-to-market strategy: Premium Content Experiences, at Scale, Across Screens; by listening to and engaging with our clients in meaningful ways; and by focusing on digital media and innovation. We were given the top performance rating by one of our Global Agency partners — out of the five media publishers they met with, we were ranked number one based on our continued commitment to providing clarity and consistency in strategy and to strengthening our partnership. Great work everyone!

With that context, there are some changes that I want to announce effective today. Seth Dallaire is leaving Yahoo! to run North American Sales at Amazon. While it’s never easy losing great people, we’re fortunate that he has a very talented team that will carry on the focus and momentum. Please join me in wishing him continued success!

As part of this transition, Mark Ellis will expand his role to take on leadership of the Global Agency and Client Partnership teams. He will continue to lead North American Field Sales.

I’m excited to announce that Peter Foster will to take on leadership duties and will serve as the lead for our partnership with AOL and Microsoft, Interclick, mid-market display, mid-market acquisition sales, and the Channel Reseller team, reporting to me. Peter joined us as part of the acquisition of 5:1 where he served as Chief Revenue Officer, and has a long career in the industry. He previously was SVP sales at ValueClick/Fastclick, one of the biggest ad networks in the world, oversaw revenue at Photobucket after it was acquired by News Corporation, was an early pioneer in the monetization space at L90, and held senior revenue posts at Kosmix and Hi5.

I’m also excited to announce that Marc Grabowski will take on an expanded role and now will head the combined Interclick and mid market sales teams. As part of this new team, Michael Katz, the CEO of Interclick, will lead all sales operations and data and performance optimization for the combined teams. Both Marc and Michael will report to Peter.

We are fortunate to have such a talented team here at Yahoo!. Ross and I are confident that Peter, Mark, and Michael will lead our efforts to change the conversation in this space and industry.

I want to thank everyone for their continued hard work and dedication. We have a great team and a lot to be excited about. We continue to hear feedback from the agencies and clients about our progress, so let’s keep up the focus and energy and deliver on our goals! Please let me or your managers know if you have any questions.

–Wayne