Global entertainment spending is set to grow from $1.1 trillion in 2002 to $1.4 trillion in 2007, a compound average growth rate of 4.8% per year.

That GDP-busting growth is the forecast of PriceWaterhouseCoopers (PWC) in the latest edition of its Global Entertainment and Media Outlook. It acknowledges that 2003 will be a slow year, but says that the pace will pick up between 2004-2007.

Aside from the blip in late 2001 and throughout 2002 caused by the September 11 outrage, terrorism and heightened insecurity are expected to have a wider, macro-economic effect on the media and entertainment industries.

"Defence industry expansion, will adversely affect private investment and advertising during the remainder of the decade," says the report. It also says that income earned by the defence industry is eventually spent in the consumer sector. It warns that this stokes media demand and inflation.

PWC appears to welcome the expansion of digital technology, which it says will soon dominate. "By the end of the decade virtually all entertainment and media consumed will be in a digital format."

But it issues a number of warnings that are particularly pertinent to the film sector. First is that there is an ongoing need to keep going to the movies - a special experience that is bigger, and more social than watching films at home, where the viewing experience is improving through the deployment of DVD (as well as pay-per-view TV and home theatre systems).

The report points to a tension between maintaining security for digital content and the need to make digital content appealing to consumers. But its sternest digital warning to the film industry is on the issue of price.

"Consumers have indicated through their behaviour that they will buy digital files only if they are priced less expensively than physical product. For example publishers are finding considerable resistance when electronic books that are sold online are offered at prices equal to or higher than their print counterparts.

The filmed entertainment industry is introducing movie downloads over the internet at prices comparable to home video rentals, but it still remains to be seen whether this business model - which relies on broadband internet access - will take off.

"The essential passivity of consumers when it comes to entertainment - 'I want to sit back and be entertained' - creates opportunities for suppliers. If the value-price equation is appropriate, consumers have shown that they'll purchase licensed product.

Added convenience, ease of use or superior product content can improve the value side, while discounts or bundled product - such as a combined CD/DVD package - can improve the price side.

Unless companies enhance the value-price proposition, they will face eroding content sales as digital technology proliferates."

PWC predicts that filmed entertainment spend will grow at a compound annual rate of 6.3% until the end of the forecast period and reach $87.6bn in 2007, up from 64.5bn in 2002.

Canada will show the fastest growth at 11.8% (from $3bn to $5.2bn in 2007), Europe the Middle east and Africa 7%, (rising from $16.1bn to 22.6bn) and the US 6.7% (from $31.7bn to $43.9bn).

In regions where video piracy represents a significant problem and cuts into legitimate sales, growth will be markedly lower: Asia Pacific will grow at a slower 2.8% ($12.1bn to $14bn) and Latin America 4.3% ($1.6bn to $1.9bn).

But PWC makes a point of highlighting China as an exception. "local investment will spur a strong box-office market, offsetting piracy's impact and leading to high single-digit growth."