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.

“I didn’t want the password to live in an email somewhere. I started thinking, what if there was something that would allow me to destroy the email?” Robbins said in an interview.

The thought stayed with him, and by summer, Robbins had dropped the other project to turn his full attention to building a service for hyper-secure email exchanges. He named the service Burn Note.

Burn Note, which opens up to the public today, allows the sender of an email to set a time frame in which the receiver can read an email before the email disappears.

At that point, the email no longer exists — anywhere.

Burn Note’s Web site says the service uses no binary logging, which means there are no standby servers, or backup copies of emails. The company uses a storage engine that has no journaling capabilities, and an underlying file system that logs metadata but not the content of the notes themselves.

While grabbing an image of the email might seem like a simple workaround, Robbins said he has introduced two methods to the service that make it extremely difficult for recipients to quickly copy the text of an email for posterity. Burn Notes can include Web links, but can’t send attached files, though Robbins has said attachments are in the works.

“I think there are a lot of legitimate uses for why people would want an off-the-record conversation,” Robbins said. “The message goes away, but it’s still been communicated to the recipient, which is the point.”

Robbins most recently served as the head of software development for Facebook-acquired Drop.io; he said the Burn Note service was partly inspired by that cloud-storage service. “There was a feature that we considered, but ultimately didn’t turn on, where a file could have a certain number of views before it self-destructed,” Robbins said.

While there currently aren’t any mobile apps for Burn Note, Robbins said that it’s a mobile-optimized Web site, so it can be accessed from a phone with a Web browser.

Highly encrypted or “vanishing” email services aren’t new. In 1999, Canada-based Hush Communications launched Hushmail, a free Web-based email system for individuals and businesses that sent PGP — Pretty Good Privacy — encrypted emails. As Wired reported, it was originally stated that “uniquely-coded” Hushmails were so encrypted that not even Hush employees with access to servers could read the emails.

But in 2007, Hush turned over a dozen CDs of emails, following a court order obtained through a mutual assistance treaty between the U.S. and Canada. The evidence was requested as part of a U.S. federal prosecution of alleged steroid dealers. The company subsequently acknowledged that Hushmails could, in some instances, be decrypted.

In 2009, the New York Times wrote about a group of scientists at the University of Washington who developed software that would make email messages disappear after a period of time. The software, called Vanish, would rely on a key-based encryption system that differed from the usual key cryptography used in digital communications, by making the “keys” erode over time.

A couple of months after that, “Freedom to Tinker,” which is hosted by Princeton’s Center for Information Technology Policy, released a paper detailing a series of experimental attacks against the Vanish prototype. The paper stated that Vanish should be considered too risky to rely on.

On a Web site for Vanish, the group acknowledged that the implementation on which Vanish was based was not adequately protected against attacks, and says it’s “investigating new directions and architectures for self-destructing data.”

Burn Note’s Robbins says Hushmail’s service and the Vanish project are different from Burn Note because those products rely on encryption keys, while Burn Note is effectively reengineering the default settings of computer systems and server systems so that nothing at all is saved.

When asked what Burn Note’s protocol would be for handling requests from law-enforcement officials for email exchanges, Robbins replied, “Burn Notes aren’t emails.”

He went on to say that the exchange of Burn Notes is more comparable to phone calls in that, unless they’re recorded, the exchange itself can’t be retrieved.

But Burn Note — unlike phone companies — doesn’t keep a log of who is communicating with whom. Robbins said the company plans to compile and study anonymous usage data, but will keep two separate logs — incoming messages and outgoing messages — rather than a log of messages exchanged between users. According to the company’s explanation of its technical procedures, even the time stamp on the message is anonymized: Burn Note rounds the times to the nearest hour so that timing cannot be used as a unique identifier.

“A lot of services launch to acclaim that they’re going make digital communications disappear,” said Paul Ohm, an associate professor of law focused on information privacy at the University of Colorado Law School. “But they sometimes become that place where bad people go to exchange information, or a haven for criminals. In order for this work, you have to stay on the side of legitimacy.”

“It’s never a complete dead end,” Ohm added. “There has to be data living somewhere, and there’s always a way to engineer around these systems.”

While Burn Note will at first be marketed to the average email user, Robbins said he hopes to attract attention from the enterprise market. “I think there’s a really interesting set of use cases around banks, especially if it can be made to plug in to existing systems,” he said.

When asked how Burn Note might comply with the record-keeping obligations of U.S. financial institutions have, Robbins said it would require a case-by-case evaluation.

“I don’t have a good answer for that, because it will require review by a legal professional before we can fully work through that type of situation,” Robbins said. He pointed to the company’s privacy policy, which plainly states:

“If you have a legal obligation to preserve data, do not use Burn Note.”

The GPS shoes have a tracking device implanted in the right sole, with a GSM/CDMA antenna snaking up behind the heel so that the GPS signal is not blocked by the body; the shoe also includes a USB port, primarily for charging the product’s battery.

Made by footwear company Aetrex, with GPS technology provided by GTX Corp., the shoes cost $299.99, with the added monthly cost of a tracking plan. Caretakers can opt to have the wearer’s location recorded every 10 minutes for $39.99 a month, or every 30 minutes for $35.99 a month.

Customers can visit the Aetrex Web site to purchase the shoes, set up an account for the shoes through GTX Corp. and, using Google Maps, create a “geo-fence” encompassing what’s considered a safe distance around a wearer’s house or living community. The caretaker can opt to have messages sent via email or receive simple SMS text messages on a cellphone when the wearer wanders outside of the geo-fence.

The caretaker can then access the online portal to find the wearer’s location on a Google Map. There’s also an emergency backup system the caretaker can call for additional help; that requires the caretaker to share the GPS information with the emergency-care provider.

Aetrex began planning and designing the GPS shoes two years ago; the product was certified by the Federal Communications Commission in September of last year and began shipping in late December. Only a few hundred pairs have sold so far, but Aetrex president Evan Schwartz said the companies have done little marketing at this point, and have been focused instead on a strategic rollout of the shoes.

Schwartz also said the company will begin shipping to Canada and other countries soon, and that Aetrex and GTX have struck a deal with an international SIM card provider to make the tech available internationally.

For now, Aetrex and GTX are selling the shoes directly to consumers, but they have been in talks with the Alzheimer’s Association and the Veterans Benefits Association to explore partnerships for marketing the shoes to assisted-living communities and geriatrics departments.

While the GPS shoes could give caregivers some peace of mind if a family member is prone to wandering, the concept of trackable clothing could raise questions from both a technical and legal standpoint.

Aetrex says the battery life of the shoes lasts two days on average, but the shoes would be rendered ineffective if a caretaker wasn’t around to charge them, or the wearer forgot to do so. Also, if the person monitoring the shoe-wearer opts in for more frequent pings, the battery will die more quickly. Aetrex says the GPS shoe system does send email or text notifications to remind the caretaker when the battery is getting low.

There’s also the possibility, of course, that the wearer could remove the shoes, or simply refuse to wear them.

When someone purchases the GPS shoes and goes to activate the online monitoring system, he or she has to sign off that they are a designated caregiver, and that they have the authority to monitor the wearer of the shoes and make those kinds of decisions for the wearer. But, as with many of the technologies we have at our fingertips, there is always the possibility of misuse.

A recent Supreme Court case involving law enforcement officials’ use of GPS to track a drug-trafficking suspect has also raised some questions about the rights civilians have when it comes tracking others using GPS technology (our Wall Street Journal/SmartMoney colleagues did a good rundown of some instances where it can be done legally). Stories like these indicate that we’re still in the early stages of setting privacy standards when it comes to digital tracking.

“It’s all kinds of good and bad and ugly popping up when it comes to GPS tech these days, and that’s definitely a concern,” Schwartz said. “There are enough people who make jokes about tracking a spouse, or what if you threw the shoe in the trunk of someone’s car and they never know it’s being used for that, that sort of thing.”

“But at the same time,” he added, “this shoe has been designed to serve a purpose, and it’s to help caregivers, so we have a hard time believing someone would abuse this.”

Correction: An earlier version of this article said the GPA shoes support CDMA technology. The shoes do not support CDMA; the antennae in the shoes are GSM/GPS.

We believe that America is at a major digital turning point. Simply, we find tremendous benefits in online technology, but we also pay a personal price for those benefits. The question is: how high a price are we willing to pay?

– Jeffrey I. Cole, director of the Center for the Digital Future, after a 10-year study by the Center incorporating more than 100 major issues involved in the impact of online technology in the United States

The NPD Group released a new report today that calculated the amount of money Americans are spending on games from the nontraditional market. That includes a lot of digital content, such as subscriptions, digital downloads, social games and mobile games, but also used games and rentals.

In the third quarter, it found that the amount spent on that “other content” totaled $1.64 billion.

While significant, NPD said it wasn’t enough to offset lower revenue from the traditional game market. NPD defines the traditional market as packaged goods sold at retail. In the third quarter, that totaled $1.3 billion.

“New physical retail sales had a rough third quarter,” said Anita Frazier, an analyst with NPD. “Increases in sales from some of these other monetization methods, and full game and add-on digital downloads in particular, only partially offset the decline see in the new physical retail channel.”

She said the overall market, including hardware, totaled $4.2 billion, down 11 percent compared to the same period a year ago.

For companies like Electronic Arts, which is investing heavily in mobile and social games and is placing big bets on online content, like today’s release of Star Wars: The Old Republic, the results of these monthly and quarterly reports are unrepresentative of the trends they are seeing.

“Everything is growing. If you look at the total interactive business, it’s a $50 billion market internationally, and that’s up double digits. That’s where we play,” said EA’s President of Labels Frank Gibeau. “We find it frustrating because it doesn’t tell the whole picture.”

In the second quarter, EA’s digital revenue, which includes downloadable console content, mobile and social — was up 30 percent year over year.

Even a company like Activision, which has been slower to develop games on Facebook and mobile, said that during the second quarter, revenue from digital channels — mostly downloadable content — increased 27 percent year ove year, and accounted for 37 percent of the company’s total net revenue.

For all-digital companies, like Zynga, which went public last week to raise $1 billion, its impact hardly seems to register.

“I think that ultimately we are an interactive entertainment company, not a packaged goods company,” Gibeau said. “We are platform and channel agnostic. The physical channel is a great channel and it’s going to be around longer than people think. … We are fine with that model, but then, when you bring that game home, you should be able to connect to the larger online world.”

Another indicator that things moved very quickly: While the Times has said it will conduct an internal and external search for a successor, it has not hired a search firm for the job, according to spokesman Robert Christie.

That said, the Times has contracted with executive recruiter Egon Zehnder International to fill a board of directors seat vacated by former Drugstore.com CEO Dawn Lepore in June. People familiar with that search say the company has been looking for candidates with digital expertise — something they’ve also indicated will be important for Robinson’s successor.

I bought it Saturday night, watched it on the plane Sunday, and laughed out loud, a bunch. You should do it, and there’s a good chance you have — techland loved this story this weekend. Also, again: It’s very funny.

But What Does It All Mean? Not a ton. It’s an evolutionary step, relevant to a select group of people who make entertainment. With one interesting twist.

The part that isn’t new here is Louis C.K. using the Web and doing it on his own. We’ve seen a bunch of that over the years, mostly from entertainers who have already become famous (or at least semi-famous) with the help of mainstream media. Prince and Radiohead sold their own music only after they sold lots of songs for big music labels. Adam Carolla leapt/got pushed from TV and radio gigs into podcasting.

The new twist here is the way his experiment changes video “windows” — which determine when shows and movies show up on different outlets. By going direct-to-fan first, C.K. doesn’t shut off his chance to end up working the Big Media Companies he says he doesn’t want to work with. He’s just making them wait. So the people who really love him can get it right away, and he can capture almost all of that value in the transaction.

We’ll call it the Louis C.K. Window.

It can run for a week, or a month, or however long he’d like to be the sole outlet for his show. But then, if he wants to get more money for his product and reach a different audience, C.K. can sell the program to HBO or Showtime or Netflix for a “pay-TV window.” And then, eventually, to the likes of Comedy Central or FX. At some point, he can retail discs and downloads via Amazon and iTunes, etc.

The Louis C.K. Window is the most gratifying, because it’s cool, and because he’ll keep almost every penny his fans spend to see him. But it’s also likely to expose him to the smallest number of people.

Let’s say, for argument’s sake, that a million people pony up for the concert — basically, that is, everyone who watches his (great) show on News Corp.’s FX channel. (News Corp. owns this site, too.)

That’s a wildly optimistic estimate, and it will still be a fraction of the people that HBO, which has some 28 million subscribers, can reach. You can fault Big Media for a lot of things, but it remains pretty good at rounding up Big Audiences.

But that’s the great thing about the Louis C.K. Window. It lets Louis C.K. — and a relatively small group of people with big ambitions, and ardent fans — have it both ways.

“Yellow Submarine” is just what it sounds like — an illustrated version of the band’s 1968 movie, which is both trippy and kid-friendly (so British!). The book was first published in 2004, but the new version features interactive goodies like song samples and bits from the animated movie.

It’s a bunch of fun and will work on both iPads and iPhones, but you’re really better off enjoying this one on the former.

If you wanted to be churlish, you could note that the free book also serves as a promotion for a compilation album based on songs featured in the book.

Less churlish: Worth noting, yet again, that a year-plus exclusive is unheard of in digital music. Apple says it has sold 10 million songs and 1.8 million albums during that time; still love to know what they paid for that privilege.

It made a splash then, but two of the three products featured by Gaga at January’s CES — a digital camera and a pair of camera-glasses — still haven’t made it to market.

And it’s unclear if one of them ever will.

The glasses, called the GL20 Camera Glasses (GL indicates the Lady Gaga “Grey Label” brand), were introduced alongside the GL10 Instant Mobile Bluetooth printer and the GL30 Instant Digital camera, which is designed in the style of old Polaroid cameras.

The printer became available for preorder in May, as planned, although it was listed at $20 more than Polaroid’s original $150 target price for retail. Polaroid Chief Technology Officer Jon Pollock explained in July that the company, like many electronics companies, has faced supply problems due to the massive earthquake in Japan.

The GL30 camera is now scheduled to launch in retail outlets in 2012. Citing consumer demand for the Gaga-hyped camera, Polaroid in November introduced the Z340 Instant Digital Camera, which has similar features and capabilities, as an alternative.

But the Gaga goggles — which were arguably the coolest element, capturing images and instantly uploading them to the device’s LCD lenses for display — still haven’t made it to market. Polaroid had previously said the gadget would arrive in the third or fourth quarter of this year at an undetermined price.

Polaroid has declined to offer insight into the delay, or to say whether store shelves will ever see the glasses. A spokeswoman for the company issued the following statement: “Polaroid and Lady Gaga are looking forward to giving consumers even more ways to restore creativity to images, both digital and printed, with additional Grey Label products in the near future. As the GL20 Camera Glasses are unlike anything seen before, additional time is needed to ensure that consumers will receive a product that exceeds expectations.”

A representative for Lady Gaga declined to comment.

To be fair, it’s not uncommon for products unveiled at CES to come to market later than expected. But for Polaroid, the delays are another ding in its armor as it struggles in the face of new digital-imaging technologies. The company has said it hoped the installment of Lady Gaga as creative director two years ago would give Polaroid a needed boost in terms of creativity and innovation.

People close to the situation have said that Lady Gaga has been “very involved” in the design and creation of the Grey Label gadgets. But, in this case, it seems that even superstar status can’t propel a product to market.

This exclamation point comes courtesy of Zenith Optimedia, via its new (scaled back) ad forecast today. It pegs Google’s share of the overall Web ad market at 44 percent, a number that has been steadily increasing for years, with the exception of a one-year hiccup in 2009.

The other takeaways are also old news: Microsoft, Yahoo and AOL are foundering and have been for years (hence their new alliance). And Facebook is starting to generate a real ad business — as opposed to just a very sticky Web site.

And based on everything we’ve heard this year, the 2011 column will look just like the ones preceding it. Except it might show even steeper gains for both Google and Facebook, given the moves both are making (YouTube and display ads for Google, new tricks like “Sponsored Stories,” plus the overwhelming attractiveness of an 800 million user base for Facebook).

Quite reasonable to assume the two of them will end this month with more than 50 percent of global spending.

So says a survey commissioned by a publishers’ trade group: It finds that two-thirds of people who read magazines on tablets and e-readers think they’ll be spending more time with digital issues over the next year. Many of them — 46 percent — are consuming more magazines — both in print and digital form — than they did before they got their hands on an iPad.* And 63 percent of them want more digital stuff to read.

Overall, the survey has generally sunny news for the magazine business, though it’s fair to wonder if the Association of Magazine Media would release a survey that had glum news.

The report does offer some guidance for the industry: 89 percent of readers want publishers to adopt a uniform way of navigating magazines, and 69 percent like watching in-app videos that run less than minute.

The other point worth noting about the report is that it exists, period. The survey, conducted earlier this month, was completed by 1,009 people “pre-screened for their ownership of mobile devices and their use of magazine-branded apps.” Up until now, pollsters couldn’t have been able to find enough respondents to make that kind of poll possible, says Chris Kevorkian, the trade group’s executive vice president for digital: “We’ve been wanting to do this research for some time, but didn’t have the critical mass to query.”

*The survey isn’t explicitly about iPad magazine editions — in theory, it covers all tablet magazine apps, as well as magazines consumed on e-readers like the Kindle and the Nook. But the majority of these things are being read on Apple’s device.

But now we’ll get Reed Hastings’s own report card, when Netflix announces its quarterly earnings this afternoon.

As Citigroup’s Mark Mahaney notes, the key numbers to look for aren’t the Q3 metrics — the company has already preannounced that its subscriber numbers are going to be lower than it initially thought — but its guidance for the rest of the year.

That’s where we’ll be able to see the impact of its many stumbles — the price hike, the broken Starz deal, Qwikster’s New Coke moment — or at least what Netflix thinks the impact will be. If Netflix subscribers are really bailing out — and not just threatening to do so on Hastings’s Facebook page — you should be able to see that reflected in its expectations for the next three months.

Remember that shortly after Netflix dropped its first bomb this summer — a 60 percent price hike for many of its customers — management predicted that it would suffer a subscriber blip in Q3, but would recover by Q4. Let’s see if they’ve hung on to that confidence.

Here are Mahaney’s best guesses for Netflix’s Q3 results and Q4 guidance, along with Wall Street’s estimates (click image to enlarge). I’ll be covering the results live at 4 pm ET.

Spoiler: It’s up!

That’s good news for a Web video company that’s trying to go public, and also not surprising. But the survey is a fun skim (PDF), with interesting nuggets about consumption on different kinds of platforms — Apple versus Android, etc. — and from different kind of publishers — TV-based sites like Hulu versus pure-play sites like YouTube, etc.

And buried in there is a good reminder of exactly what it is we do when we watch video on the Web: We don’t stick around.

We’re most likely to watch longest if we’re watching on a “broadcast” site like Hulu or NBC.com, but even then we’re not parked very long: The average session for one of those sites clocks in around 3:30, Brightcove says. It’s much less for anyone else.

So here’s a clip that’s just a tad over the broadcast average, and which should be on a broadcast site. Alas, NBC’s unlamented “Studio 60” isn’t available anymore on Hulu, so to track it down online you’ve got to hunt and peck on YouTube. This excellent “Network” homage is how the show’s pilot kicked off in 2006.

And while we’re on the topic — weird that this failed Aaron Sorkin show doesn’t get more love, especially in a post-“Social Network” world. Yes, it’s overwrought, over-the-top stuff, which treats a “Saturday Night Live”-like show as if it’s every bit as important as “The West Wing” — there’s even an Afghanistan kidnap plot late in the show’s single season. But whatever! I’d rather watch hours of flawed Sorkin stuff than almost anything else on TV. Surely there have to be more people like me out there. Right?

Dish Network Corp., Amazon.com Inc. and Google Inc. remain in the mix but have all proposed different arrangements, the people said. Yahoo Inc., which made the initial approach to Hulu that kicked off a full sale process, has withdrawn from the process, according to two people familiar with the matter.

The offers reflect the potential buyers’ estimates of the value of the service, which is based on the duration of Hulu’s contracts with its owners for providing television programming online, as well as the video site’s technology, the people said.

Read the rest of this post on the original site »

But here’s the most important thing to think about: Will it help Amazon sell more stuff?

Because that’s the thing that’s truly going to separate this tablet from every other one on the market, including the iPad — it comes to us from a retailer, not a hardware company.

That heritage gives the tablet the best chance to offer Apple credible competition, and also its reason for being.

Think of all of those potential customers who have been buying stuff from Amazon for years. And all of those vendors who have been selling their stuff via Amazon for years.

We’ve seen this work once before, of course. In 2007, Amazon introduced the Kindle and essentially created the e-book market. Fast forward to last May, when Jeff Bezos announced that his company was selling more digital books than ink-and-paper versions.

And this one should be designed to help Bezos move more inventory, too.

There doesn’t have to be a direct analog to the Kindle and books. It’s possible, for instance, that the new tablet’s killer feature won’t be access to digital goods, but a free subscription to Amazon Prime, the service that gives subscribers faster access to the physical stuff they order.

But if there isn’t something about the new gadget that makes buying more music or movies or … something more attractive, then something will have gone wrong.

Meanwhile, here’s what we do know:

• It’s going to have a seven-inch screen — considerably smaller than the iPad’s 10 inches, though everyone expects a bigger model next year.
• It will run on a modified version of Google’s Android operating system.
• It’s going to have support from the content companies from the get-go: Amazon has at least three big magazine publishers signed on to port their titles to the device. And the company has been steadily accumulating a virtual warehouse full of video titles – not as many as Netflix, but getting closer — it will be able to stream to the tablet, too.

More shortly! Amazon’s unveiling kicks off at 10 am in New York, and I’ll be there for the blow-by-blow. Check back before then for a link to a liveblog. While you’re waiting you can read Ina Fried’s piece on potential patent issues for the Amazon tablet. UPDATE: Here you go, with the relevant details, via Bloomberg: $200, wifi-only, 30 days free Amazon Prime.

That’s the question posed to Netflix content boss Ted Sarandos by News Corp. digital boss Jon Miller today at a Paley Center event in Los Angeles.

Sarandos’s response is basically a shrug: “Being able to precisely forecast and predict the behavior of that many people on fairly radical change is something that we’ll get better at all the time.”

Miller didn’t press Sarandos, and Sarandos didn’t evince any sense that the company had second thoughts about its price hike, which he argues really isn’t a price hike.

Wall Street is not nearly as sanguine, however, and has chopped NFLX shares down by 18 percent today, to $170. Recall, again, that NFLX was nearly at $300 earlier this summer.

And here I should point out that News Corp., Miller’s employer, also owns this Web site. Other disclosures, which Miller noted in his introduction: Miller is a board member of Netflix competitor Hulu, and News Corp. has content deals with Sarandos and Netflix.

So: Many conflicts here! But this is still a very good, very timely interview. Runs about 40 minutes, and well worth watching if you want to dive deeply into both Netflix and the digital media business.

If you’re looking for Sarandos’s take on the end of the Starz deal, by the way, that kicks in around the 20-minute mark. Very short version: “Buyers and sellers disagree on values and prices all the time. And that’s all that happened,” Sarandos says, adding that his plan is to “spend an enormous amount of money on things that get watched an enormous amount of time.”

That doesn’t jibe with reports that the deal broke down because of Starz’ insistence that Netflix institute a new pay tier for its content. But maybe someone can ask about that in a different interview.

Netflix says the subscriber cut won’t affect its financial guidance. In a brief note, it defends, again, its reasoning:

The strategy behind the split of our services is four-fold:
(1) to create a dedicated DVD rental division that takes pride in great execution and maximizes the opportunity for disc rental over the coming decade;
(2) to enable us to improve our global streaming service even more rapidly, because it is not meshed with a domestic DVD business;
(3) to enable us, with the growth in revenue, to license more streaming content and thereby improve our streaming service even more;
(4) to remain very price aggressive, with $7.99 per month for unlimited streaming of a huge library of TV shows and movies, and $7.99 per month for unlimited DVD rentals, 1 out at-a-time.

We know our decision to split our services has upset many of our subscribers, which we don’t take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come.

In July, after Netflix announced the price hike (for customers who want both DVD and streaming Web video services), it said that it expected a bump in Q3 revenues as customers adjusted to the pricing, but that its growth trajectory would resume by the end of the year.

But while the price hike kicked off a torrent of complaints on the Web, CEO Reed Hastings said the company had expected to hear more carping: “We knew what we were getting into, we tried to be as straightforward as we could, and that has worked out very well for us.”

Netflix shares, which had kissed $300 earlier this summer, were down to $208 by yesterday’s close. Now they’re down another another 16 percent, to $174, in premarket trading.

And now for our media bummer of the week: Even without a 2008-style meltdown, ad spending is already contracting.

Kantar Media says that U.S. ad spending grew 2.8 percent in Q2. That’s still growth, but it’s the smallest quarterly gain since the media business began crawling out of its post-Lehman hole.

In fact, it turns out that ad spending has been slowing since the second half of last year. Ad buys grew by 8.7 percent in Q3 2010, but have been shrinking since then.

Some sales guys I’ve talked with are still shrugging off the decline as the result of more difficult comps: It was a lot easier to post big year-over-year increases when the preceding year was the apocalypse.

And again, if you’re in digital ad sales and you don’t work for Yahoo or AOL, you’re probably not seeing any sign of a slowdown at all. And if you sell newspaper ads, you’re used to bad news because you haven’t really had good news in years.

But if things really do crater worldwide — and today doesn’t look like much fun at all — then all bets are off, no matter what you’re selling.

He replaces Edgar Bronfman Jr., who has run Warner Music Group since 2004, but will remain with the company as chairman of its board.

The company also announced that it is bringing Thomas Lee back to the company’s board. Lee had previously served as a board member from 2004 through this year, when his private equity company held a large stake in the music label. His reappointment does not mean he’ll be reinvesting in the company, I’m told.

People inside the company hold out the possibility that Bronfman could return to day-to-day leadership of the company if it succeeds in buying EMI Music, a longtime would-be merger partner currently owned by Citigroup. But even if Warner wins that bidding round, regulatory approval could take a year or more, so it’s not realistic to expect him back sooner than that, if ever.

Here’s Bronfman’s internal note to his employees, followed by the press release announcing the moves.

Dear Colleagues:

As Warner Music Group begins its next chapter, well-positioned for some truly exciting and unprecedented opportunities, I am pleased to announce we are adding a new member to our management team: Steve Cooper. Effective today, Steve will be serving as WMG’s Chief Executive Officer, working out of our New York office and I will serve as Chairman of the Board of WMG, continuing to work out of both our New York and London offices. Lyor and Cameron will remain in their positions, heading up Recorded Music and Music Publishing respectively, reporting directly to Steve.

I’d like to take a moment to explain to you the rationale behind this change:

Capitalizing on the opportunities before us will require an intensive and all-consuming effort from a broad and deep management team. For this reason, following the close of the sale and the transition of WMG from a public company to a subsidiary of Access Industries, in several discussions with Len and the Access team, I conveyed my strong conviction that my energies on behalf of the company would best be directed toward transformative transactions and long-term strategy. Len was supportive of my wishes provided we could identify the executive to whom I could hand off day-to-day management responsibilities. Fortunately, in Steve Cooper we have that executive.

Steve has a long and distinguished career of service to many companies. Having worked very closely with him over the past several months, I can tell you that he is a highly effective operator who brings a wide range of skills and experience to WMG, most recently, of course, as WMG’s Chairman. And, as a longtime partner to Len, Steve knows the Access team well and will be an effective liaison between them and WMG. More information about Steve’s background can be found in the press release we are issuing today.

Now, a few thank yous are in order. First of all, I want to thank Len and Access for being amenable to my kicking myself upstairs and understanding that I came to WMG as both an investor and operator—a dual role in which I have served throughout my career. After leading the acquisition from Time Warner, transforming the company, and selling it to Access, I believe I can add greater value by addressing the challenges WMG faces on a macro scale, while handing over the day-to-day reins to Steve.

Second, I want to thank Steve for being willing to swap roles with me. After collaborating so well with him, and sensing the energy and enthusiasm he brings to operating a company, I had no doubt that Steve was serving in the role that was more natural for me at this stage in my WMG tenure, while I was in the role in which Steve could bring to bear his many talents.

But the biggest thank you I’ve saved for last. And that’s to all our amazing employees around the world. Thank you. In transforming WMG, together we’ve performed something of a miracle. Despite the industry’s complex transition and the global economic downturn, we have grown profitability, improved our competitive position, and developed new business models, all while continuing to focus intensely on our core mission: artist development. A company’s true value is the quality of its employees, and you are the finest group of employees with whom I have ever worked. None of what we have accomplished could have happened without the extraordinary talent that is the WMG team.

I’m excited for what the next chapter holds. And I look forward to writing that chapter with all of you.

Please join me in welcoming Steve to the team. As always, please email me any questions or comments you may have.

Edgar

WARNER MUSIC GROUP’S BOARD OF DIRECTORS ELECTS
EDGAR BRONFMAN, JR. AS CHAIRMAN TO FOCUS ON STRATEGY AND GROWTH OPPORTUNITIES
NEW YORK, August 19, 2011 – Warner Music Group Corp. (WMG) today announced that Edgar Bronfman, Jr., who had been serving as the company’s Chief Executive Officer, has been appointed to the position of Chairman of the company’s Board of Directors and Stephen F. Cooper, who had been serving as Chairman, has been elected to serve as WMG’s Chief Executive Officer. Bronfman will focus on the company’s strategy and growth opportunities while Cooper will be responsible for the company’s day-to-day operations. Cooper will continue to serve on the company’s Board of Directors.
Lyor Cohen, Chairman and CEO, Recorded Music and Cameron Strang, Chairman and CEO of Warner/Chappell Music, will remain in their positions, reporting directly to Cooper.
Thomas H. Lee, the Chairman and CEO of Thomas H. Lee Capital, LLC, who served as a member of WMG’s Board from March 2004 through July 2011, has been elected as a new Director of WMG. With the appointment of Lee, the size of WMG’s Board has increased from nine to 10 members.
Bronfman said, “With the Access Industries transaction closed and WMG well-positioned for its next exciting chapter, it was clear that in order to best seize the strategic opportunities before us, we needed to deploy our team in the most effective and imaginative manner possible. Given my desire to focus on growth opportunities and Steve’s extensive background in management across a wide array of companies and industries, I am grateful that Steve accepted the offer to change roles and to serve as our CEO. I look forward to continuing our successful partnership.”
Bronfman added, “I’m pleased to welcome Tom Lee to our Board. Tom and I previously served together on WMG’s Board, and his contributions were invaluable. We’re fortunate that going forward we’ll be able to benefit from his insight and his history with the company.”
In addition to his role with WMG, Cooper is a member of the Supervisory Board for LyondellBasell Industries N.V., one of the world’s largest olefins, polyolefins, chemicals and refining companies. Cooper is an advisor at Zolfo Cooper, a leading financial advisory and interim management firm, of which he was a co-founder and former Chairman. Cooper is also Managing Partner of Cooper Investment Partners, a private equity firm. He has more than 30 years of experience as a financial advisor, and has served as chairman or chief executive officer of various businesses, including Vice Chairman and member of the office of Chief Executive Officer of Metro-Goldwyn-Mayer, Inc. and Chief Executive Officer of Hawaiian Telcom. Cooper received a B.A. from Occidental College and an M.B.A. from the University of Pennsylvania Wharton School of Business.

Facebook is a big part of that, but as the seventh largest developer on the platform, and with only 12 percent as many active monthly users as Zynga, it has a long way to go.

It believes the solution is leaning on its deep catalog of brands — something Zynga and many others can’t compete with. So far, it’s launched Monopoly Millionaires, FIFA Superstars and Scrabble.

The next one, officially launching today, is The Sims Social.

Sims Social is a brand with a lot of history. It’s been played by 140 million fans in 22 languages in 60 countries around the world. To date, it has been available on the PC, PlayStation, Xbox, Wii and mobile.

Electronic Arts originally unveiled the game at E3 in June. To put the social game in context, I wrote at the time:

One of the most anticipated launches of the year is EA’s Battlefield 3, which is expected to go head to head with the seemingly unstoppable Call of Duty franchise. But at the company’s eardrum-splitting press conference in downtown Los Angeles, it also showed off The Sims, which is reflective of a wider trend in the industry to embrace other platforms.

With the launch of Sims on Facebook, EA is promising that your social life will never be the same. Given the game has the potential to create some very awkward moments with your friends and partners, that’s hardly an overstatement.

Players will be presented with challenges, such as forming romantic relationships, flirting, joking and getting married. They can build dream homes, take showers together, or play pranks or achieve goals, such as having 10 girls in the hot tub at the same time.

At E3, I wrote: “Who needs Battlefield 3 when you can begin World War 3 among your friends?”

There’s no requirement to “marry” your real-life wife or husband, or boyfriend or girlfriend, which could cause all sorts of real-life sparks to fly. If you can imagine slapping your husband (or the other woman) after reading about his latest accomplishments in his news feed, don’t worry, you can do that in the game, too.

EA is hoping the high intensity situations will lead to explosive growth.

The game, which is available in five languages, was technically launched today, but has been around in beta for awhile. It won the 2011 Best Browser Game Award at Gamescom in Germany this week, and it topped this week’s list of fastest-growing games by daily active users, according to InsideSocialGames.com. It has roughly 1.45 million daily active users on Facebook, gaining 2,287 percent compared to last week.

Sims Social will be free to play and will monetize both through virtual goods and in-game advertising, such as items from Dr Pepper, Dunkin’ Donuts and Toyota that can provide extra boosts and benefits when players need them.

This is not the first time the company has brought the PC game and console title to the Internet, but last time it failed.

John Buchanan, VP of Marketing at EA Play, said it’s been more than five years since that experiment and that this time they put in the time and energy to build something that both Sims fans and newcomers can enjoy.

“It is an incredibly exciting time for us. You have the No. 1 PC franchise and the No. 1 social network. It’s really exciting. It’s a game that is going to revolutionize social gaming and the Sims,” he said.

To build this game, EA’s Play Label teamed up with Playfish, its social games division. This marks the first time for a massive collaboration between the two groups, said CJ Prober, VP of publishing at Playfish.

“We used everything that the Sims team knows about the game for the past 10 years, and what works and what the fans love, and Playfish brought everything it knows about social gaming. It was a truly collaborative effort.”

Prober said development doesn’t stop today. Up next will be a mobile component that will allow users to stay in touch with their Facebook experiences while on the go.

That’s a good idea. That way, you can get out of the hot tub quickly before you get into real hot water.

The Times saw Q2 revenue drop two percent and overall ad dollars drop four percent — digital ad dollars were up a modest 2.6 percent, and that wasn’t enough to make up for a 6.4 percent drop in print.

Circulation revenue was flat, but that number masks an interesting split. Print circulation dollars were down — the publisher didn’t disclose the size of the drop — but digital subscription dollars made up for the loss.

The Times says it now has 224,000 subscribers to the digital editions it rolled out in March; a month after launch, it said subscriptions for that service had “surpassed 100,000.” The paper also says it has 57,000 subscribers for digital subscriptions it sells via platforms like Amazon’s Kindle.

The Times also said it had signed up 100,000 free digital subscribers via a giveaway sponsored by Ford’s Lincoln brand, and that 756,000 home delivery subscribers were getting digital delivery as well, which comes free with their print subscriptions.

The Times says it expects to see circulation revenue in the “low single digits” next quarter, presumably because of more digital dollars. “Our ability to further monetize our digital content will provide us with a significant new revenue stream in the second half of this year,” says CEO Janet Robinson via press release.

Other notes:

• The paper’s About Group, once the major engine of its digital operations, saw revenue shrink yet again, this time by 17.3 percent. And again, the Times blamed part of the drop on Google: “Design changes in the cost-per-click advertisements served by Google had a negative effect,” as did “algorithm changes Google implemented during the first quarter of 2011.” The Times also cited “an increase in competition in the content space”; it didn’t mention that in May it had pushed out About CEO Cella Irvine.
• If you ignore a $161 million goodwill write-down for some of the publisher’s regional papers and other one-time charges and gains, the Times’s earnings would have been 14 cents per share, down from 18 cents a year ago. Operating profit, minus one-time charges and depreciation, amortization, etc., was $83 million, down from $93 million.
• The Times says it expects to see similar ad results next quarter.

A report released by the NPD Group found that total game sales from the retail channel, including hardware and software, totaled $1.03 billion, down 10 percent from June 2010.

All three sectors — hardware, software and accessories — recorded as well. Hardware was down nine percent, software was down 12 percent and accessories were down 11 percent.

The decreases were expected, since June can typically be slow as game developers wait to release big hit titles around the holiday period. Additionally, the makeup of the industry is changing.

The physical retail channel still generates the majority of industry sales, but there are a growing number of ways to play games, including mobile apps and downloadable content.

Earlier this week, the NPD Group reported that in the first quarter of the year, digital revenues totaled $1.85 billion.

In June, Take-Two Interactive had three of the top-selling games, including L.A. Noire in first place, Duke Nukem Forever in second and NBA 2K11 in seventh. Sony’s Infamous 2 placed third, and Disney’s LEGO Pirates of the Caribbean ranked fourth.  Nintendo’s Legend of Zelda placed fifth with 283,000 units sold.

The Xbox 360 continues to be the best-selling console, selling more units in the U.S. than any other console for 12 of the past 13 months. In June it sold 507,000 units.

But it was the holiday season that Microsoft was most excited about in a statement issued to the press:

“The size of the Kinect games portfolio will triple by the end of the year and Xbox will bring new partnerships like UFC and Disney to the platform as well as blockbuster games, movies, music and TV together in one place. We expect Xbox 360 to maintain its lead and to be number one worldwide by the end of the year, selling more hardware units than PlayStation and Wii.”

The NPD Group reports today that in the first quarter of the year, digital revenues totaled $1.85 billion, coming in just below traditional sales of $2 billion.

The estimates were released today ahead of its monthly report coming out on Thursday, which is expected to show another weak period for traditional physical sales due to a lull in big game releases and the less than stellar demand for Nintendo’s new 3DS handheld, according to MarketWatch.

Unlike the estimates released today, the Thursday report only accounts for sales made at retail for hardware, software, and accessories — and not the digital format content distribution, which is currently seeing the most growth.

Zynga’s IPO may be the biggest example of this trend.

The San Francisco company, known for such games as CityVille on Facebook and Words With Friends on mobile, reported revenues of $235.4 million in the first quarter of this year. None of those revenues would be accounted for in the traditional physical channel because they come primarily from microtransactions inside online games.

“While the new physical retail channel still generates the majority of industry sales, our expanded research coverage allows us to assess the total consumer spend across the growing number of ways to acquire and experience gaming, including mobile apps and downloadable content,” said Anita Frazier, an analyst at the NPD Group.

MarketWatch reports that two analysts expect more declines in June after sales slid 19 percent in May compared to the same month the previous year. Doug Creutz of Cowen & Co. wrote in a note to clients that he believes sales will decline 12 percent; Michael Pachter of Wedbush Securities predicted a drop of six percent.

New game releases for June include Duke Nukem Forever from Take-Two Interactive, which received disappointing reviews.