I see several flaws in this business model:
1. Advertising supported entertainment only works when the end user can't skip the advertising. The demise of television started when home VCRs came on the market, and people could fast forward. Cable, initially without ads, accelerated it. DVRs today continue the destruction of the ad supported TV model.
Book readers are far too accustomed to no having to put up with ads to start doing so. The internet has lowered the barriers to entry to the market to the point where a homeless bum could become the next Stephen King, through his local library's computer. There will always be ad free books available; the market cannot possibly be constricted to prevent this. And the big publishers will find that, while readers are not their customers, advertisers are, advertisers will not pay to advertise in books nobody will read.
2. While cloud services have obvious advantages for content sellers, they don't seem to be paying attention to the fact that they are a distinct disadvantage to consumers. Technology cannot make them anywhere near as realiable, overall, as downloading a copy to your own computer/reader/smart phone. And again, with the non-existent barriers to entry to the market, there will always be books available for straight sale/download purchase. The market will gravitate towards that.
3. Anything that can reasonably be called a tablet will be significantly more expensive to manufacture than an eink book reader. It will have to sell for more (50%-100% more, at the moment, if the nook/nook color/nook STR if any indication). That will put the tables in to a different price bracket than the eink devices, and for people who buy books, there is no advantage to the tablet format.
4. People who buy books aren't interested in multimedia extravaganzas. We've had multimedia publishing for 15+ years; it's called the World Wide Web. And, about 99.999999% of the time, the more multimedia it is, the more thoroughly it sucks. It is not a replacement for books, and will not kill the market for books.
And, last but not least, this is not about "personalizing and tailoring" books to the reader, it's about personalizing and tailoring advertising to the individual reader. And while that might actually be of benefit to the consumer, lying about it won't fly. If it's a medium people won't tolerate advertising in to begin with, it cannot be personalized enough to make to acceptable.
I forsee a period in the near future where I, personally, will be reading a lot more stuff from Project Gutenburg, and a lot less new stuff.