The clearest failing of European film is its ability to reach audiences, particularly where that means crossing national borders. The dream of a single European market with a common cultural identity is nowhere further from reality than in the movement of film between countries.

Whether the motivation is business or increasing cultural diversity, audiences are surely paramount. Yet production numbers are often used as a measure of the health of the industry in many European countries, as if mere existence validated work.

A critical review of recent production figures, however, suggests that the European theatrical market simply cannot handle product levels, which means that even critically-acclaimed films can disappear into obscurity.

It is true that the screen average of European films often beats those of the studio blockbusters but that merely accentuates the fact that demand is not matched by supply - too few screens, too little time.

To make matters worse, the limited potential for viewing is taken as evidence of a lack of public demand - it's a self-fulfilling prophecy.

The left hand axis shows the number of films produced while the right hand is admissions

To make matters worse, the limited potential for viewing is taken as evidence of a lack of public demand - it's a self-fulfilling prophecy.

The figures on page 6 give a stark illustration of the realities of the market and are themselves only an indication of production levels.

Each nation has its own way of measuring numbers (hence the anomaly in the graph which suggests that more films were seen than were made).

The figures give a stark illustration of the realities of the market and they are themselves open to question.

What is difficult to deny is that Europe is producing films at a higher rate than at any time in the last 20 years.

That's partly due to the success of tax incentives in attracting and supporting production.

But there is no correlation with actual release, never mind box-office performance.

That is particularly true of European-produced film, where supply has always been out of sync with demand (as measured by the blunt instrument of box-office success)

The market share for European films fluctuates between countries but is only a fraction of US studio tentpole releases, which last summer demonstrated the power of back-to-back blockbusters.

Hollywood has a 70% market share in most territories and even a strong film-producing nation like France could only achieve a 36.5% market share in 2007, according to Unifrance. Click here for more.

The share for EU-produced films outside their home territories is often negligibly small.

The figures give a stark illustration of the realities of the market and are themselves only an indication of production levels.

Each nation has its own way of measuring numbers (hence the anomaly in the graph which suggests that more films were seen than were made).

The figures give a stark illustration of the realities of the market and they are themselves open to question.

What is difficult to deny is that Europe is producing films at a higher rate than at any time in the last 20 years.

That's partly due to the success of tax incentives in attracting and supporting production.

But there is no correlation with actual release, never mind box-office performance.

That is particularly true of European-produced film, where supply has always been out of sync with demand (as measured by the blunt instrument of box-office success)

The market share for European films fluctuates between countries but is only a fraction of US studio tentpole releases, which last summer demonstrated the power of back-to-back blockbusters.

Hollywood has a 70% market share in most territories and even a strong film-producing nation like France could only achieve a 36.5% market share in 2007, according to Unifrance. Click here for more.

The share for EU-produced films outside their home territories is often negligibly small.


DEPTH OF TALENT

There are of course exceptions: 2007 was a strong year for some territories and the trend appears to have carried over into the first-quarter of 2008.

Some are indeed travelling well. Last year, French films scored a healthy 53.7 million admissions outside France for the year 2007 with revenues of $369m, according to export body Unifrance.

Individual films scored exceptional results. Olivier Dahan's French/UK/Czech co-production La Vie En Rose (La Mome) (pictured) and Florian Henckel von Donnersmarck's The Lives Of Others (Das Leben Der Anderen) both topped $60m internationally (ie outside North America).

Drawing conclusions about the performance of such hit films is difficult. It is fairly clear that success or failure can only partly be attributed to subjective judgements of quality.

Both of the films cited above were given big boosts by major awards: The Lives Of Others won the best foreign-language Oscar among 45 international honours; while Marion Cotillard swept the board at this year's biggest awards - winning the best actress Oscar, Golden Globe and BAFTA.

It tends to be such international recognition of quality that marks out a film for wider distribution: would Cristian Mungiu's 4 Months, 3 Weeks, And 2 Days have received the recognition it richly deserved without the Palme D'Or'

But there has never been any suggestion of a crisis of talent in Europe. It boasts great film-makers and great films - hence the hunger in Hollywood for remakes and for auteurs such as Michael Haneke to come and direct.

The argument is that success us institutionally restricted to a few films and that there is a large amount of wasted time, money and talent.

NEW PRODUCTION MUSCLE

Ironically, a big boost for market share is likely to come from the studios which have been signing production and distribution deals with independent producers. Click here for more.

Much energy has also been expended in Europe over the last year to ensure the few films that do succeed are able to reach audiences more efficiently and profitably.

Creating a European studio model has become an obsession in the last 12 months and there has been serious talk of a European studio for the first time since the collapse of recreating the Polygram Filmed Entertainment in the 90s.

At Berlin in 2008, Franco-Tunisian entrepreneur and Quinta Communications boss Tarak Ben Ammar (pictured) announced plans for a European distribution network, supported by his partners at bankers Goldman Sachs. Click here for more.

Wild Bunch is another business rapidly expanding business building a European distribution network. Click here for more.

That is particularly true of European produced film, whose supply has always been out of sync with demand (as measured by the blunt instrument of box-office success)

DIGITAL DIVIDE

Optimism at the top end of the European market further accentuates the fears at the other end of the scale

If new European mini-majors can sew up wider and more efficient theatrical distribution for their films, where's the room for the next tier down'

The number of films that can benefit is institutionally limited by screen numbers: the more efficient the distribution of the few, the greater the squeeze on the many.

What's more there are legitimate reasons for believing that a few smaller arthouse cinemas may be left behind in the digital switchover - unable to find a financially-viable model.

Given the maturity of the European exhibition market, it's difficult to see how a smaller independent producer can satisfy financiers who these days want to see product at a well-developed stage with clear ideas for distribution.

That strain will get only worse as more films are made. It's a fair presumption, given the easier access to film-making production equipment, that more films will be made.

There will, of course, be exceptions to prove the rules. Big competition will always leave gaps for enterprising smaller players.

But if we define success in terms of box office, there are reasons for concern about how we will refresh the roots of cinema. Over-production looks like a very real matter for public concern.

This is particularly true if we believe the argument of this report that digital can bring new film-making talent into the market, creating real cultural diversity, even a democratised industry, for the first time.

HOW TO RESPOND

There are a number of ways to deal with over-production in the European theatrical market

» PROTECTIONISM

Removing the competition is the most direct means of supporting European film releases.

In China, the government has imposed restrictions on foreign films, occasionally blocking Hollywood hits. It requires the muscle of a nascent superpower to be able to exert such influence.

Yet even in democratic countries, such as South Korea, which has had a strong quota system, the force of international political press ure has forced an opening of markets.

In a globalised economy, protectionism in the form of quotas to support local product or jobs is now all but impossible - as the governments of the UK and Germany found in drafting new tax incentives in 2006 and 2007.

The cultural exception is the only chink in the globalised free trade armour but even here there are press ures.

On a limited scale, however, there have been some experiments in supporting local product. The UK Film Council's Digital Screen Network, for example, insisted that recipients of D-cinema equipment showed a proportion of UK and specialist film.

European bodies, such as Europa Cinemas, have also been supporting exhibitors in creating more diverse programming. But these can only point the industry in the right direction and it is now absolutely clear that Europe will encourage, but not pay for, digital change.

» BUILD MORE CINEMAS

Cinema building is at the heart of film industry strategies in China, India and indeed Eastern Europe. Many Western European countries, even developed ones, have plans for upgrading and some new construction.

Most of the key population centres are however well catered for. The developed countries of Western Europe have seen only little movement in the number of screens. There are fears that the numbers may even reduce.

The big hope is that digital cinema will allow a rejuvenation of exhibition. The chapter on digital cinema makes the point in more detail, but a key advantage of digital print distribution should be flexibility in programming and screening times to maximise the ability to reach markets.

» REMOVE PRODUCTION INCENTIVES

Cutting off the financial life support for films would certainly reduce numbers of productions and we know what effect cutbacks, or removal, of government subsidies have had in countries such as Spain, Italy and the Czech Republic.

Some countries have taken the decision to concentrate spending on smaller number of productions. Sweden is just one of the territories to have reviewed the way it supports production - responding to what it says is 'the rapid technological development, new audience patterns, and the concentration of power in the cinema market.'

The uncomfortable realities of the market are becoming a serious political issue for most national film bodies. That's a particular problem because the sums of money available for subsidy is often very small.

Finnish producers' last year stopped all feature production until promised production subsidy of just $1.7m (Eu1.2m).

The talk of a subsidy culture in Europe is overstated but there is certainly greater emphasis on supporting production than helping films find distribution.

» DO NOTHING

Production levels have never been a match for box-office performance in Europe, where films have often survived on soft money.

But it is getting harder to justify budgets on the level of viewing now possible. Doing nothing means relying on subsidies that are already spread paper thin in most of Europe.

» EXPORT PRODUCT

If home markets are saturated, the smart move is to look beyond borders. It's what Hollywood has done in recent years. Screen International's box office analysts showed in 2006 that a studio film would now take less than a third of its revenue from domestic markets.

Some European companies have very strong track records in keeping budgets high by chasing international revenues: Working Title in the UK as a good example. The Hollywood studios, far from being rivals, may prove to be very effective partners in this internationalisation.

As mentioned earlier, some countries, such as France have consistently been successful exporters of film but most countries have to watch their products picked up by markets in 'waves'. The tap can be turned off as well as on at startling speed, making the creation of a sustainable local industry difficult.

Efficient and reliable distribution is a luxury for a few films in Europe and that will depend increasingly on support from studios or mini-majors.

Individual auteurs can of course over time build a strong following.

But for new talent trying to find a place for even strong product, significant festival or awards success is vital or a film can easily find itself marginalised.

» EMBRACE DIGITAL CHANGE

All of the above ideas have huge holes - practical, political and legal. The truth is that it is getting more difficult to sustain a European business now before the squeeze on product which is only just beginning to impact.

It is a question of simple mathematics that the current analogue industry cannot sustain more films with less space to show them. This report looks at some of the potential alternatives but staying still does not seem to be an option.

EUROPEAN POLICY

However, any industry-led solution must also look to the public policy arena where a bias also exists towards the supply end of the equation rather than the demand end.

Much of the thinking behind support for European film-making focuses on the conditions of making a film, and this is what industry currently demands from it.

The EU MEDIA programme specifically does not provide funding for production costs, looking instead to pre- and post-production activities.

However, its approach does not go so far as to consider what Europeans as consumers might want from European film.

EU policy on supporting film can be seen to have two distinct arms.

The Commission has acknowledged the economic importance of the film industry to the EU economy and clearly recognises that Europe's competitive place in that global market needs regulatory support.

Alongside this, a major consideration for the EC is that film, as part of the content industries, 'creates added value by exploiting and networking European cultural diversity'.

Indeed, one of the main objectives of the MEDIA programme - the EU's support programme for the audiovisual industry - is to explicitly promote and preserve that cultural diversity.

AUDIENCE FOCUS

But whatever the motive behind these programmes, the objectives are unlikely to be achieved if European movies are not made to be seen by audiences.

There is scope to argue that the focus of Europe's efforts is misdirected in both the economic and cultural spheres.

Creating the infrastructure and means of distribution to enable audiences to view European movies would prove more beneficial to the industry and the aim of cultural diversity than encouraging the production of yet more films.

In the rapidly changing environment of digital and on demand services, the role of the consumer in the policy debate may be forced to move forward.

With a potentially increasing choice of product and of how to access it, the traditional structural barriers and related arguments on distribution disappear.

MULTI-TERRITORY LICENCES

As a result, the European Commission is currently promoting the idea of multi-territory licences to reduce obstacles to the cross-border distribution of films on new platforms.

The Commission recognises that rights holders have the final decision on their licences. But at the same time, the EC has issued a fairly forceful message that it wants the consumer to be able to take full advantage of the benefits of a single market and is prepared to act to ensure this.

Success would be real recognition of the importance of the consumer in the supply debate.

Concrete examples of the possibilities offered by new technology are also moving consideration of audiences forward.

New offerings such as 3D offerings of opera, rock concerts and sporting events have been made possible by developments in technology, but they have been driven by a recognition that this is what audiences would like to experience.

A COLLECTIVE PROBLEM

However, Pete Buckingham, Head of distribution and exhibition at the UK Film Council, is one of those concerned that these developments seem to be mainly happening in the USA, while Europe lags behind.

As Buckingham comments: 'Where is the public policy and funding on technology and other issues, such as new start-up, that are consumer facing' Are we content just to be a continent of producers while every other aspect of film-making develops outside of Europe'

'We face a collective problem - changes are occurring outside of the public policy arena while we are worrying about public funding for producing yet another movie in Luxembourg.'

The debate on whether or not to shift efforts from promoting production to distribution and marketing considerations is still struggling to surface in Europe.

However, technological advances, changing consumer expectations and industry developments elsewhere in the world may push that argument forward regardless.

Unless the industry can force itself to re-examine longstanding and now sterile debates, it will find itself lagging behind its US counterparts once again.

UBIQUITOUS ENTERTAINMENT

The pessimist may look at the above figures and see only less films on reduced budgets but it ignores critical trends that work strongly in the favour of film.

We will come to these positive drivers of change in future chapters. But the simple facts are that customers are demanding more entertainment than at any time in history.

What's more the evidence is that they want that entertainment wherever and whenever they choose.

Over-supply is a relative judgement. We only over-produce for today's market, which is in itself undergoing dramatic changes.

Reassessing the theatrical domination of the economics of the business is not an anti-exhibitor viewpoint.

Indeed the theatrical has a potential ace up its sleeve in digital cinema, which offers the prospect of a new approach to programming, matching demand with supply.

Lower cost movement of digital prints ought to give flexibility to cinema owners and there have been signs of success in the US.

This report devotes a chapter to the subject. Nonetheless the only positive means of tackling over production lies in the exploitation of the new media opportunities now coming on stream.