The 47-acre site, on the last big piece of open land in Los Angeles, would have included sound stages, production facilities and offices much like the fabled back lots of the 1930s at Warner Brothers, MGM and Twentieth Century Fox.
It would also have been the cornerstone of a new urban development, bringing homes and offices for 70,000 residents to the site of the last coastal wetland left in southern California.
But after protracted negotiations, punctuated by loud protests from environmentalists and repeated financial crises dogging the developers, DreamWorks - backed by Spielberg, David Geffen and Jeffrey Katzenberg - decided to pull the plug.
"We have always maintained we would move forward with Playa Vista only if the financial terms of the deal made good business sense for DreamWorks," Mr Katzenberg said. "We have learnt a great deal during the past four years, and it is clear that this move is no longer in DreamWorks' best interest. It was simply not meant to be."
The decision came as a major blow to the prestige of the company, raising questions about how thinly its considerable resources are being stretched, and also knocked the stuffing out of the biggest construction project Los Angeles has contemplated in decades.
City officials and developers appeared stunned and confused because they had offered DreamWorks the best possible terms for the land and construction costs. The land was sold for $20m (pounds 12m)- a snip for west Los Angeles - and the city offered a further $35m in tax breaks.
Ostensibly, the reason for the pull-out was the high cost of borrowing construction funds. The DreamWorks principals had hoped to spend no more than $250m, but were concerned that rising interest rates and repayment terms might push the total above $300m.
It is not clear why the extra $50m - small change for any of the three of them - should have been such a problem.
One possible sticking point is that government officials, DreamWorks and environmentalists have all complained of difficulties in negotiating with the developers, accusing them of reneging on important promises.
Another concern is the long-term financial viability of a company such as DreamWorks, which aspires to finance its own movies, television series and records without the backing of a big media conglomerate. Movies have become so expensive to make and market that they have in effect become loss leaders for other media products and merchandising - outlets that DreamWorks does not have.
Another factor is that other parts of the United States, and Canada and Australia, offer first-rate facilities and crews at far lower cost. Even the weather is no longer vital, because of advances in film technology.
For now, DreamWorks has decided to expand its facilities on the Universal Studios lot and may build on to its recently complete state-of-the-art animation facility in Glendale.
Steven Spielberg did not rule out fulfilling his dream of a new studio at some time in the future. "I am committed first and foremost to doing what is best for our company, and look forward to exploring other options for our permanent home," he said.
FRANCIS FORD COPPOLA dreamt of turning his production company, American Zoetrope, into a fully fledged studio and bought a 10.5-acre lot in Hollywood in 1980 for $6.7m. His ambitions foundered at the first hurdle as his own film One From The Heart ran out of budgetary control and then flopped at the box office. `One Through The Heart', as it became known, forced Coppola to file for bankruptcy in 1982.
Ever since he retained the sequel and merchandising rights to the original Star Wars film, Lucas has in effect been a one-man studio, not only financing his own projects himself but building an empire of hi-tech film facilities, including the special-effects unit Industrial Light and Magic. Based in Marin County, north of San Francisco, he has his corporate headquarters on a campus known as Skywalker Ranch.
Weinstein, head of the New York-based production company Miramax, is hoping to build new sound stages at the abandoned Brooklyn naval dockyards. The project has got the go-ahead from city officials but some details still need to be ironed out over the financing of a project that will cost more than $100m. Miramax, which bankrolled Shakespeare in Love, started out as an independent but is now owned by Disney.Reuse content