We are in the post-major studio and pre-internet era,' says Ira Deutchman, founder and CEO of New York-based Emerging Pictures. The supposed starting point and destination in his assertion are of course highly debatable. But there is now a clear consensus that this is an industry in transition. And as ever in a period of business change, it is much easier to see the holes in the ancient regime than the opportunities for the future.

A great many businesses in all areas of film are acutely feeling the growing pains as change takes hold and the studios are feeling the pinch too.

Deutchman concedes that these difficulties have not reached the attention of consumers. 'I doubt that the general public sees a crisis (in independent film) in any shape at the moment, given the fact that, on the surface, it would appear that Hollywood has overcome the malaise of a couple of years ago.'

Yet he is not the only one to feel that the improvement in box-office performance for blockbusters, the opening of international markets and the vast sums of private equity cash pouring into Hollywood may in the long run be seen as the last hurrah of the old economic order.

The studios are now looking at a serious set of issues: the credit crunch; the writers' strike; looming disputes with actors and directors next summer; arguments over release windows; and fears for DVD revenues with little more than guesswork about their new media replacement.

This week, a report from a new analyst business Global Media Intelligence (GMI), suggests that this summer's record-breaking box-office figures are disguising underlying losses for the studios.

The study suggests that 132 medium-to-big budget films last year collectively lost $1.9bn, compared to $2.2bn profits from similar-sized films in 2004. The analysis is open to dispute, but the underlying point seems difficult to deny. GMI believes big stars are creaming off unrealistic fees while DVD revenues have dropped (see graphic, page 8).

Given that DVD money is 12.5% down this year on 2006, the decline should now be accelerating. The great hopes for an upturn, such as 3D, video-on-demand (VoD) and online distribution, have yet to make an impact and the studios are undoubtedly going to have to adapt to the realities of the market.

The billions from institutional investment may have contributed to a loss of strict financial discipline at many studios (GMI notes Fox as an exception). 'The availability of this risk capital on relatively favourable terms may have played a role in the seeming imperviousness to higher production budgets and sharply increased talent payments,' say the authors.

'We think that, based on the initial results, many of the funds that entered into these financial arrangements will have sub par or even negative returns. As for the future of these types of financing, we believe that investors will demand - and most likely get - much more favourable terms from the studios.'

There is a strong argument, which many of the banks have been making recently, that a correction to the excesses of hedge fund finance that led to a somewhat scattergun boom in the US is at worst a necessary evil and at best a means of driving out the mediocre.

Indie opportunity

The studios will no doubt adapt to their environment. But what Deutchman suggests is that as studios suffer in this period of transition, there are big opportunities for independents to ensure that the studio domination of the theatrical-led business is not transferred to the online one.

Speaking at the recent Screen International-supported Power To The Pixel conference at the BFI Times London Film Festival, he called on film-makers to seize the day and ensure that Hollywood does not call all the shots.

Again, the public won't be seeing much sign of this potential right now. The quantity of studio product is squeezing independents with the continuing upward curve in film-making around the world looking like unsustainable over-production.

There is no question that the current theatrical-led business is a struggle for indies this year and Deutchman fears that studio domination may continue on new platforms. 'There is no way for (studio) distributors to justify the current economic model - they take way too much money out of the equation,' he says. 'They try to justify it by making it look like rocket science when in fact there are ways to get out movies a lot less expensively.'

Chris McGurk, CEO and founder of indie studio Overture Films, believes that the size and cost of Hollywood production may prove to be the independents' big opportunity. The majors have reached a point where the necessities of scale in a global market have forced them into providing lowest-common denominator content with returns that are extraordinarily difficult to maintain.

'When a big studio spends $100m on a film and nearly as much to market it, they just cannot afford to have a failure and that mostly leads to risk-averse formulaic film-making,' McGurk told Screen International's recent UK Film Finance Summit.

That has left a gaping hole in the market which those with vision can fill by putting distribution at the top of the agenda. 'The true economic profile of any film can only be judged across the timeframe when it is distributed across all platforms,' McGurk said. 'With such fragmentation, no single distribution outlet can provide the revenues necessary to make a film successful. Therefore, it is essential to control under unified ownership as many of the links in the distribution chain as possible before you start spending production dollars.'

Putting the distribution horse before the production cart is perhaps the fundamental starting point of this new era. What it really means is making the customer bigger than the process, an approach which successful independent film-makers have been taking for years.

Pedro Almodovar, for example, works closely with his brother Agustin through their El Deseo company to ensure that they have a hand in each area of the distribution process. Agustin Almodovar says that the key to the success of El Deseo is in keeping as much active interest in promotion as possible. 'We make business our ally,' he says. 'There's no difference between the making of a film and its commercial exploitation. Pedro and I approve each commercial venture associated with the movie.'

That 'fine tuning' extends to insisting on the quality of screens that are allowed to show the product in theatres.

What such entrepreneurial film-makers suggest is that the transition to a new digital era can work to an independent's advantage if he or she understands, and controls where possible, the chain from production to audience.

The challenge for Europe's film industry

But can the digital opportunities scale up to the grand international ambitions' At the European Parliament in Brussels last week, film-makers, companies and policy-makers met to discuss the future of the European Industry.

There is always an underlying frustration in such discussions, particularly given the irritation that a continent with a rich film history has to play second fiddle to Hollywood studios, which many see as cultural imperialists. Given that European films can boast between 20% and 25% of the European box office at any one time - at least on a par with a major studio - how is it that numbers cannot be translated into muscle in distribution or excite the interest of bankers'

'We don't just want to be a niche,' asserts Gregory Paulger, director of the European Commission's Infos Directorate for Audiovisual, Media and Internet.

Yet there is little sign of real progress towards concentrating European cinematic muscle. Nor is there a great deal to tie together the wide range of small to medium-sized businesses spread throughout the continent. Many film companies focus largely on local film or look outward to wider global markets. The notion of drawing together these disparate companies into a coherent entity is a dream that is perpetually in the distance.

There can be action on a pan-continental basis. But European bodies have stepped in to insist on trans-national policies before and national film industries have not always felt that intervention has been to their benefit.

It is the European Commission's competition regulators, for example, that have been insisting that tax incentives cannot be used as a means of driving inward investment and must be tied to cultural tests.

The Commission is keen to see more positive steps to ease the transition to the digital era. It completed a consultation at the end of 2006 on a policy to 'pave the way for a true European single market for online content delivery' and 'to evaluate whether regulatory measures at EU level are required to ensure the completion of a true EU market for online content without borders'.

Further initiatives are expected this year but those borders remain, even in areas like rights, regulation and law. Leading lawyer Jose Antonio Suarez, of Spanish legal firm Suarez de la Dehesa Abogados, points out that there are wide variations in the legal frameworks of nation states in areas like copyright and competition law.

For him the lack of a concerted response to piracy proves the point. 'European regulation has to address the fact that as long as the Union does not assume that domestic piracy is a fraud, and a serious one, the online European entertainment industry will not take off - yet some member states are not prepared to act against domestic piracy.' Such changes are a necessary prerequisite to taking advantage of digital opportunities, says Suarez.

'What we need are incentives, not subsidies,' adds Agustin Almodovar, including a better deal on copyright. But he also believes there are very big opportunities for combining strength in diplomatic circles to secure deals with countries outside Europe, bringing emerging territories into European rather than US orbit.

'Why should Hollywood negotiate rights with China when the EU could have better results and understands cultural diversity'' he asks.

The problem remains that European bodies with all the tensions with individual states tend to offer vague idealism whereas Hollywood is clearer about its aims, which are less cultural and more economic.

Europe also has to deal with the realities of a fragmented continent. Broadband penetration currently stands at 15.7% of the population of the 25 EU countries and expected high growth will come piecemeal.

In other words, it is difficult to see unified growth that will allow concerted pan-continental development and there is even a wide range of service providers wanting to lead new media developments such as VoD.

Small film companies will find it hard to negotiate rights deals with providers such as telecoms companies. That is the argument for collective action allowing film-makers to pool their influence to demand a better deal. The necessity for such co-operation has been made more obvious by the European failure to share in the private equity boom that has enriched the US.

'We are not able to finance the industry's modus operandi,' says Joseph Vogten, adviser in audiovisual finance at the European Investment Bank. He warns that what European film-makers want is micro-finance for individual projects but that is one thing that the EIB cannot do.

In other words, independents may be able to reduce the unequal relationship with the studios but they - and the bodies that can help support them - need imagination.

Even then, says Alain Sussfeld, director general of UGC, we need to remember that the customer will decide the final winners: 'We need to do away with the myth that because work is available it will be viewed.'

- Additional reporting by Eleanor Kenny.