• by Mark Walsh  @markfwal, March 14, 2011

Interactive media ranked as the second-most-profitable industry segment from 2006 to 2010 after cable operators, according to a new study by Ernst & Young. The interactive category, which includes companies providing access to information and entertainment through search engines, portals and other online formats, had an average EBIDTA margin of 35%, compared to 38% for cable service providers.

Following interactive in profitability was the cable network business at 31%; satellite television, 27%; publishing, 20%; conglomerates, 19%; broadcast TV, 18%; and film and television production, electronic games and music, each at 11%. In terms of EBIDTA dollars, interactive was tops with 15% growth during the four-year period -- just ahead of cable networks, at 14%, and cable operators and satellite television, both at 10%.

The report notes that the digital category has benefited from the ongoing shift of consumers and advertisers -- away from traditional media to new media platforms. Online spending has been the fastest-growing of all direct marketing channels in recent years.

The companies included in the firm's study are publicly traded, with annual U.S. revenue between $1 billion and $5 billion. Interactive companies include AOL, Google, Yahoo and Microsoft. Video game companies include Electronic Arts, THQ Inc. and Ubisoft Entertainment. 

Even so, the sector has not been immune to the downturn that began in 2008.

Internet advertising dropped by 3.4% in 2009, causing interactive media EBIDTA dollar growth to slow from 19% in 2008 to 6% in 2009. Still, the study points out that margins have steadily improved overall -- Internet companies have become more efficient as they have scaled. Relative to other types of media, people are spending more time online.

"This will continue to support advertising spending through interactive media companies," stated the Ernst & Young study. "Internet advertising is set to quickly recover as the structural trends that drive it -- larger audiences and the ability to deliver targeted ads and measure return on ad spending -- remain as potent as ever."

When it comes to electronic games, the report observed that casual games are gaining popularity through social networks, such as Facebook, and helping to generate micropayments and ad dollars. Nothing highlights that trend better than the runaway success of "Angry Birds," which creator Rovio Inc. said is driving $1 million a month in advertising alone. At the same time, micro-transactions are adding incremental revenue and helping drive loyalty "as consumers feel invested in their virtual communities and characters."

This shift is also forcing traditional game publishers to develop more titles for the casual-games market or acquire companies in the category. That pattern will lead to more M&A activity in the games industry in the next few years, predicts Ernst & Young.

In traditional media segments more broadly, digital formats represent the opportunity to increase profitability even as analog ones fade. In the publishing industry, for instance, the report points to the growth of the e-reader market and the promise that huge markets like China hold for such products. By 2015, that country has been projected to outpace the U.S. as the biggest e-book market globally.

"Media and entertainment companies are unbundling and repackaging content in new and innovative ways and recognizing that the majority of future revenue will come from services rather than products," said Ernst & Young media and entertainment partner Mark Besca.