'Paranormal Activity': Hollywood's demonic saviour

Shot on a camcorder, on a budget of £9,000, the film is sweeping through the US

It's cheap, but not very cheerful. In fact, it's utterly terrifying. But as a mood of austerity grips Hollywood, a horror movie made for a few thousand dollars may be creating a new blueprint for the film industry's financial future.

The film, Paranormal Activity, features an unknown cast and crew, and was made for the meagre budget of $15,000 (£9,300). Yet, on the back of an inspired marketing campaign, and exponential hype, it has been selling-out US cinemas and is poised to outperform a host of starry rivals.

Already dubbed "one of the scariest movies of all time", its success is drawing comparisons with The Blair Witch Project, the documentary-style film which in 1999 became the first viral marketing sensation of the internet era, returning a staggering $250m against its $60,000 budget.

The new film, a tale of demonic possession, made mostly on a camcorder, is gaining remarkable momentum in the run-up to Hallowe'en. It represents a rare good news story in an industry bracing itself for cuts to budgets and star salaries, following a slew of redundancies among leading studio executives. It was first released by Paramount a fortnight ago, in just 12 locations and shown only at midnight. But last week Paranormal Activity expanded to 33 US cinemas, making the unthinkably-high sum of $500,000.

On Friday, it was screened in 155 US cinemas. Despite the limited nature of its distribution (an average Hollywood film debuts in around 3,000 locations) it is expected to break into the box office top 10 this weekend, alongside offerings from Michael Moore, Vince Vaughn and Matt Damon.

"I've never seen anything like this," said Gitesh Pandya, an analyst who runs the internet site boxofficeguru.com. "This is a movie where a conventional release pattern would have flopped. They had to do something different."

Not only does Paranormal Activity prove that hit films don't always need to cost tens of millions of dollars, it also demonstrates how a cheap-but-inventive PR campaign can outgun multimillion dollar traditional marketing efforts.

Paramount purchased the film in the New Year, after its unknown director, Oren Peli, showed it at the Slamdance Film Festival. Its strictly limited release has created an aura of exclusivity around the film, which spent the week among the top "trending" topics on the social networking website Twitter.

The trailer is also a low-budget triumph: it was released only on YouTube and garnered nearly 1.5 million views. It intersperses clips from the narrative – about a young couple who tape spooky goings-on in their San Diego house – with footage of a screaming audience at a test screening.

The film's official website, meanwhile, invites would-be viewers to click on an icon to "demand" that it is screened in their home town. So far, almost 250,000 voters have done just that. "They've done a great job of creating a pent-up demand to see the movie," said Paul Pflug, a Hollywood PR consultant who masterminded the marketing of The Blair Witch Project. "The key has been to make it seem exclusive, and difficult to see, and that has made it a sell-out."

The billion-dollar question, of course, is whether Paranormal Activity's business model, which ignores special effects and expensive marketing in favour of simple storytelling, can be replicated.