This has been the year of the reality check. Over the last few years, there has been reason for confidence about strong growth. Globalisation was opening or reopening territories, with vast populations seemingly all demanding to be entertained. New technologies were promising to crash through the limitations of the physical world and create new routes to market as well as breathe new life into theatres.

And at the beginning of 2007, there was excited talk of the hedge-fund boom in the studios stretching into at least the higher echelons of the international industry. Banks and international financiers were backing plans for new European studios that promised to stitch up multi-territory deals.

That finance has not totally evaporated. New deals are still intermittently declared; Stewart Till, for example, was able to announce in September the acquisition of Icon's international arm, backed by money from New York-based international industrial group Access Industries.

Yet as the year developed, worried talk of a 'credit crunch' turned to a realisation that much of the world was heading for full-scale recession. How that will affect the industry is unclear.

As there is no such homogenous body as the 'international film business', it is a pointless exercise to try to measure what effect the recession might have on it.

Downturns emphasise the reality that the industry is fragmented by country and region, by the scale of business and by different interests all along the value chain. How a South Korean producer sees the world right now is very different from a Norwegian exhibitor.

Nonetheless, generalisations quickly gain currency and for a while, there was talk of movies being 'recession proof', based on ageing historical data that remains untested.

It is true the box office has remained strong in many territories. Indeed, if content remains the one true king, this has been a good year. Demand remains high and the notion of an industry running out of ideas is provably wrong even before we enter a new 3D era.

The first big global hit of the year, Cloverfield, was an extraordinary exercise in exploiting boundaries that many thought had long passed into cliche. Reports of ambulance crews taking viewers to hospital may have been a wheeze from the marketing department, but the use of handheld cameras was disorientating and a very smart means of rethinking the monster movie at low cost.

Cannes produced Waltz With Bashir, Il Divo and The Class, which all told their stories in startling and different ways and with a power nothing but cinema could deliver.

The fact Matteo Garrone's Gomorrah, and the book on which it was based, should attract Mafia death threats and actual killings is a testament that the relevance of film remains.

Even a big hit such as Mamma Mia! The Movie showed there is nothing like the theatre for a shared feelgood factor. As one Indian producer pointed out in Dubai this week, the film is basically Eurovision Bollywood.

So from The Dark Knight to the smallest micro hit, film has retained its muscle; audiences have lost none of their appetite; and the theatrical bit of the industry that the neophiliacs had suggested was the most likely victim of a digital age is leading the way. But those facts only add to the reality check: this is a business without an efficient and transparent means to connect production with audiences.

Production outstrips demand

In most international territories, production is not linked to demand. The weakness of government support for production based on cultural protectionism is that films are made without actually reaching audiences. Figures from the European Audiovisual Observatory in Cannes this year revealed the number of films produced in Europe was growing steadily, with no relation to box office at all.

The contrast with the US studios is clear. With the end of the hedge-fund boom, the studios - and more to the point their multinational, diversified owners - are having to focus on real business.

The culture of easy money is gone, replaced by harsh business realities that are beginning to have an impact on jobs. The studios have been reducing the number of big productions, building around fewer but smarter franchises.

The new realities at least in part explain a difference in attitude from actors at the prospect of a strike compared to their writing colleagues at the start of the year.

Some of the studios are also working at the other end of the scale; at Berlin, Universal Pictures International revealed details of its plans to marry its distribution muscle with local film-makers, building out from local success to maximise reach.

The squeeze has come in the middle. Most dramatic has been the closure or restructure of some of the studios' specialty arms that were once seen as the future hope for Hollywood. The absorption of New Line Cinema into Warner Bros Entertainment as a genre unit in March is still having an effect on markets.

Even accepting Miramax president Daniel Battsek's suggestion in October that there was a danger in veering wildly from one end of the scale to the other, there is no question the specialty dream of studios and mini-majors has been getting a hefty dose of reality. That fact was emphasised this month when Bob Yari revealed his Yari Film Group's releasing division had been compelled by court order to go into involuntary Chapter 11 bankruptcy.

The perfect storm in the markets that Yari described has, however, not yet impacted on the production levels of many national industries. But while there have been major successes in local films, such as the record-breaking Welcome To The Sticks in France, it is difficult to see rising levels of production as anything other than over-production.

Certainly cinemas could not accommodate the level of films made, ostensibly for cultural reasons, and yet were unable to reach beyond small audiences in the big cities.

Online distribution moves

There are only two possible answers to over-production: fewer films or increased distribution through new channels.

'Straight to online' might have been a funny put-down a couple of years ago, but there have been significant signs of interest. Again, these have been relatively low-scale projects but name directors have tried their hand at reaching audiences through the internet. Wayne Wang's The Princess Of Nebraska premiered on YouTube and claimed 165,000 hits in its first two days. Michael Moore similarly opted to release his documentary Slacker Uprising online. In both cases, the critical issue was a desire to reach and influence a wider audience than arthouse cinema can deliver.

It is a long way from here to a mass acceptance of online distribution in film, but a generation of net-native film-makers who believe they can make a mark online are highly visible at virtually every conference and festival. At the very least, there are film-makers who see online work as an effective calling card. And yet, this year will have disappointed the revolutionaries. Digital may be finding its feet but the industry is scarcely shaking in its boots yet.

That is partly because DVD has proven highly resilient. Predictions of a big downturn for the physical format have proved premature. It remains the dominant format in terms of revenue and sales. The format war won by Blu-ray had a beneficial effect of driving down costs which may lead to a big leap forward in DVD sales during the holiday seasons, at least in key US and Japanese markets.

One factor is that online alternatives have failed to materialise. Apple's iTunes has established a lead in the legal download market with a movie service it launched this year, yet it is dwarfed by DVD sales and that may remain. A Screen Digest report suggested in December that online revenues would account for just a fraction of the market by 2012 - although predictions about virtually all online developments are difficult.

Digital cinema stalls

Perhaps the biggest digital disappointment, however, has been the achingly slow progress of the switch to digital cinema. Ironically, even as doubts about the inevitability of D-cinema change have evaporated, the progress has stalled.

The studios have been pumping millions into providing content they believe takes advantage of this trend - 2009 ought to be the year of 3D. Some are even more specific, believing James Cameron's Avatar will be the breakthrough 3D movie that starts an era just as surely as sound did. And Disney made an unequivocal commitment to the process, this year pledging to make all future animations in 3D.

Yet for much of the world, the third dimension is going to be missing. Indeed, in Europe in particular, pessimists are predicting mass closure of small cinemas.

Recession has turned that concern into a major issue. Even in the US, where installation was happening fast, there has been a slowdown. But in Europe, in particular, with its wide spread of smaller independent film sectors, the fear of a knock-on to the wider film industry is very real.

Fewer places to show film will exacerbate the over-supply issue and raise questions about the basis of film policy - how can you have a cultural justification for funding productions that few will see'

But new opportunities for smaller exhibitors are becoming clearer. The lucrative screening of live opera in cinemas around Europe has shown the power of cinema as a community venue. The possibility of showing a broader range of film is also promising and may throw up opportunities. In Brazil, this year, a new business model from MovieMobz is showing the potential of cinema-on-demand in which audiences can help fill programming.

A breakthrough in 2009 may come from a range of sources. Government at all levels may understand the need to protect a vital community resource, the bigger chains may decide that delaying the switch longer is dangerous in a highly competitive entertainment marketplace, or the industry may decide it needs to make a collective decision to look again at the deal on the table in the interests of all.

Either way, the future of theatrical depends on change.