Hollywood's work force should continue to expand in 2006 to meet the increasing demand for original programming, but the industry as a whole faces mounting challenges from declining boxoffice and DVD growth to runaway production and union militancy, according to study to be released Tuesday.

The Los Angeles Economic Development Corp. last surveyed the local and California entertainment economy about three years ago, just as employment was picking up after a three-year decline attributed to strike fears and the resulting disruption of production schedules.

The latest study finds Hollywood grappling with many of the same issues, with the added uncertainty of shifting consumer tastes and emerging technologies like video-on-demand.

"The industry seems to be in a constant state of turmoil, and the stakes are rising," LAEDC chief economist Jack Kyser and economist George Huang said in the report.

Part of the problem, the report finds, is that many of the stakeholders are focused on different, if not opposing, goals.

Gov. Arnold Schwarzenegger plans to reintroduce a production incentive package in January to combat runaway production, but resistance remains among some legislators who view it as a "giveaway" to a small, affluent sector based in Southern California.

Likewise, the public tends to dismiss Hollywood as glamorous and wealthy, while the unions wage a fundamental fight to retain jobs and raise residuals, through strikes if necessary. The studios also are under constant pressure to adapt their business models as mainstays such as DVD sales cool and new distribution outlets like the video iPod emerge.

Amid the changes, one constant remained: The industry continues to grow as an economic force.

Revenue on a national scale rose from $38.1 billion in 1997 to $52 billion in 2002, according to the report. California's share of that increased from $25.1 billion to $34 billion in the same period, and film/TV production remains the third-largest employer in Los Angeles County.

After sizable gains in 2004, California's entertainment work force expanded again this year, to an estimated 123,000 employees (not counting independent contractors, who bring the total to more than 240,000). Those full-time jobs also tend to pay well, with an average salary of $80,402 for those in motion picture and television production in Los Angeles County and $189,830 for those in film and video distribution, according to the U.S. Bureau of Labor Statistics.

The employment trend should carry through 2006, as the industry adds at least 2,000 more jobs and closes in on its peak of 127,400 in 1999.

Most of those gains were from television production in the Los Angeles area as the major networks shift their focus to scripted shows and the cable outlets seek to generate more original content. Weakness in the value of the dollar compared with the Canadian dollar and euro also made it more financially attractive to work locally rather than take advantage of incentives abroad or from other states.

Location production in the L.A. region also is up 7.5% this year compared with the same period of 2004, again reflecting the impact of increased TV production.

Runaway production remains a threat as several Canadian provinces raised their incentives in response to the weak dollar and saw immediate benefits, the report contends. Other U.S. states also are aggressively courting these productions.

Sixteen one-hour series continue to be shot outside of Los Angeles, representing an estimated loss of about $600 million, according to the local permitting agency, the Entertainment Industry Development Corp.

"Even in TV, where we do have an overwhelming advantage here (in Los Angeles), there are signs that other jurisdictions can be successful in luring those shows," EIDC president Steve MacDonald said.

Using production statistics from The Hollywood Reporter, the LAEDC finds that the major studios tend to go to other countries when they leave California, while independent producers increasingly prefer the benefits offered by other states.

Job growth also could be threatened by strikes as SAG and WGA have vowed to get tough in negotiations after failing to secure a greater share of DVD revenue last year, according to the report. Even a possible or "de facto" strike could be devastating as the lull that followed a stockpiling of production from April 2001-March 2002 cost the L.A. area an estimated $526 million in income.

SAG's contract with advertisers, which sparked a six-month strike in 2000, expires in October. WGA's main studio contract expires in November 2007, and both SAG and the DGA must renegotiate their deals with the studios before June 2008.

"The industry is aware of the union militancy, but you're at a period where union leadership don't see the whole picture and -- for SAG and WGA -- they need to sit down and see what is realistic," Kyser said. "You don't want to cause great disruptions because another de facto strike would cause great disruption for the community."

The studios already are under pressure from a domestic boxoffice that is running about 6%-7% below last year's average-to-date. Various forces are blamed, according to the study, from the narrowing of the home video release window to consumers' embrace of home theaters.

At the same time, DVD sales have slowed considerably this year, dropping from $15.2 billion in 2004 to an estimated $10.2 billion this year, based on a forecast by Standard & Poor's.

Technology remains a principal source of both potential and fear, the study concludes.

One looming breakthrough -- video-on-demand -- concerns the studios because of the possible negative impact on DVD sales and boxoffice. At the same time, the ability to deliver TV and film content via broadband Internet would open the door to more independent film distribution and the global market for non-English film and TV content.