In 1895 the Lumire brothers in France developed the Cinematographe camera-projector and in so doing helped to spawn an industry that has had a profound cultural, economic and industrial impact on the world.

But as cinemas and film museums worldwide prepare to celebrate the centenary of the moving image, the film community in Europe, the birthplace of the art that the Lumi re machine gave its name to, faces a bleak future. Dwarfed by the might of Hollywood, there is little, it appears, that Europe's film makers can do to break out from the niche market in which they find themselves trapped.

In two weeks' time, one of the British film industry's most prominent champions, David Puttnam, will deliver the last in a series of eight lectures on the history of cinema (1895-1995) at the University of Potsdam in Germany. Researching and delivering the series, called Hearts and Minds, Myths and Money: a Journey Through the History of Cinema, has been a sobering experience that has provided him with further evidence, if he ever needed it, of a "history of missed opportunities for Europe generally and Britain in particular".

And hard facts and figures gathered recently for a recent report by a European Union think-tank on the future of the community's audiovisual policy --an initiative in which Puttnam played a key role -- have further underlined the precariousness of the industry. He says: "Looking at the problems Europe is facing in the entertainment industry, I can see that it is not possible for us to achieve anything more than a niche market. I do not believe we can ever develop the critical mass needed to put us in a position where we can be competitive with the Americans."

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The insights from these two perspectives has led 53-year-old Puttnam, producer of Oscar-winning films such as Chariots of Fire, The Killing Fields and The Mission, to form a powerful vision of how Britain at least can begin to tackle the crisis.

A few weeks ago, Puttnam gave a speech at the Labour Party conference on education and new technology that mapped out a radical new path for the audiovisual industry that would lead to its marriage with education.

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"Through the Potsdam lectures I realised that this is an area that no one yet dominates and was up for grabs. I am convinced, like many influential Americans, that the multimedia education market has the potential to be a bigger grossing industry than the entertainment business."

But Puttnam warns that a crucial ingredient for a successful multimedia education industry with serious worldwide influence will be a domestic education system "which goes with, rather than fights against, the grain of social change".

There is a strong case, for example, for teachers and lecturers to do what they can to increase students' attention spans. But on the other hand one is also dealing with the real world, a world which bombards young people with images and impressions and does so with extraordinary speed.

"It is easy to say that we are dealing with a generation with lower attention spans but I would also argue that we are dealing with a generation that is so fast on the uptake, whose speed of response is so extraordinary that this is the real reason for lower attention spans." And it is rather like the movies today. "It is amazing how fast the audience are, how little plot and explanation they want. In fact after a while they resent explanation. They enjoy interacting and picking up hints."

Puttnam, a visiting professor at Bristol University where he lectures on film and television, argues that technology can help students and teachers to go with this grain, enabling them to engage and deal with problems such as low attention spans, time pressures and curriculum overload which conventional methods find difficult to tackle.

And the changes in attitude to technology needed at all tiers of education must be addressed in parallel to the needs of the British economy. He says: "Here we have a nation floundering around knowing that it has two serious problems. First a desperately under-skilled and under-educated younger generation -- certainly in relation to the competition that is going to hit them in a decade. And second its low success rate in creating attractive, employment generating, wealth-creating opp- ortunities." Puttnam believes that one would be hard pushed in Britain to find a more formidable wealth-creating partnership than that which links up the audio-visual industry with education to exploit the multimedia revolution.

"Having got a domestic market for multimedia education res- ources into play and making it work, we can then seriously turn our attention to taking advantage of export opportunities because we have, thank God, the English language, we are recognised as a source of knowledge and have a strong tradition in teaching backed up by powerful accreditation systems. We are uniquely placed."

To illustrate the future without measures to develop a home-grown multimedia education industry, Puttnam has compiled, through his work for the EU, a worrying analysis.

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He explains that 15 years ago cinema box office revenue accounted for more than 95 per cent of total revenue generated by the industry worldwide. By 2010, he predicts that 95 per cent of revenue will come from what is currently termed "ancillary" markets such as TV, video, satellite and cable. He finds the idea of ancillary markets operating at 95 per cent of total revenue quite funny.

Puttnam says that until the advent of television in the 1950s, cinemas were the only market for films. Even with the arrival of television, cinemas retained their importance because revenue from films shown on TV was low.

Ten years ago though, the market began to fragment with video crashing in on the scene. An overnight success, video now accounts for about 35 per cent of total revenue. The advent of cable has further eroded cinema's market so that now, something like 70 per cent of total revenues for "normal" films -- excluding blockbusters like Steven Spielberg's Jurassic Park -- come from non-cinema sources.

"As we move towards more cabling and further build up of multi-channel satellite programmes, there is no question that the 95 per cent figure in 2010 for the so-called ancillary market will be correct. What was seen in 1960 as an ancillary market is now dominant." While box office revenue has increased in value its share of the film market has reduced: "This is what is so incredible: there has been a dramatic increase in the size of the market," says Puttnam.

And the United States has a stranglehold on it. With a population of 350 million, the EU boasts the largest audio visual market in the developed world and its value is predicted by Brussels to treble to Pounds 100 billion over the next 20 years. But the European film industry hardly features on this map of opportunity with the current share of the American film industry in the EU standing at an awesome 80 per cent.

While cinema itself is still a very big business that has taken 100 years to mature, Puttnam warns against ignoring the lesson that must be learned from more recent media entrants such as the video games business which, although having only existed for about ten years, is already a bigger grossing industry than cinema.

"It is this speed of response and growth which can just as easily impact upon the education sector. Within a decade distance-learning packages or similar products could become as common as the CD player."

So where does this leave Britain? He says: "If you accept that the enormous growth in the market has driven, generated and benefited the US entertainment industry with Europe left nowhere, and you accept my analysis that technology related teaching is inevitable, then we are left with a very simple choice: do we manufacture our own multimedia resources for education at all levels or do we import them from the US? Are we going to hand over this brand new, potentially massive business to the US in exactly the same way that we handed them the entertainment industry?" And if the US is to be handed the new business on plate, Puttnam for one wants the British government and public to know exactly what is being given up.

"Unlike cinema, we will be handing over a medium where we have great skill. With cinema you can always argue about our skill in relation to competitor countries but this is not so with education and multimedia skills -- animation in particular. The other downside is that if you do let it all go, then what is this country? If a major part of your entertainment has shifted abroad and then the same thing happens with education resources then who are we? It would be far too close to the cultural bone. This is a giant issue." He is urging central government to thrash out a clear and well informed strategy for Britain's audio-visual industry and the education sector so that they stand a chance of beating off stiff competition from the US which is already gearing up for the "edutainment" world. Although he believes that the American effort is far too fragmented at the moment, he provides little comfort for those in government who would like to mull over the issue in endless meetings.

"We have two years. Everyone I talk to is saying this. Either by the end of that period we are motoring and moving rapidly in the business or the Americans will be so far ahead that we will never catch them." He says that there are some promising signals emanating from the departments of education and trade and industry but he wants decisive action.

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"One strong encouragement for government to act is to let it understand the folly of inaction. If the Americans are so comfortable with this enormous entertainment business they have built over the last 50 years -- with instant congressional support whenever the industry has needed it -- why would we let slip the opportunity to build its equivalent in the educational sector. Why on earth would we do it to ourselves?"