Yesterday morning, I had the pleasure of dining with Scott Ross, president of Digital Domain, the company responsible for the special effects in Titanic, What Dreams May Come, Apollo 13, True Lies, I Robot, and many others. Special effects are a computationally expensive endeavor that moreover require significant and innovative artistry. Scott observed that the past few years have witnessed a number of algorithmic breakthroughs on the path to complete photorealism: in this general order, the proper rendering and animation of clothing, hair, and now facial features. Scott went on to note that the windows are the eyes of the soul, and this particular facial feature is really the one remaining problem to tackle. Digital Domain probably models fluids better than anyone in the business (see, for example, The Day After Tomorrow), but as far as photorealistic rendering of humans are concerned, the industry is already there, according to Scott. Actors who inconveniently die in the middle of production may be brought back to life, stunts that would be far too dangerous for any human to undertake are carried out digitally, and individuals, crowds (both human and otherwise), and sets are regularly added to films to supplement or replace artifacts in the real world. This is not to say that virtual actors are the future and that the artistic lifetime of human actors is numbered. From my perspective outside Hollywood, the situation seems very much the same as with the growth of electronic synthesizers. When these devices really hit the mainstream in the 70s and 80s, everyone was afraid that musicians would be a dying breed. Well, synthesizers are still mainstream and they have permitted marginal artists to produce dreadful music much more rapidly than they could in the past, but they have also unleashed new forms of expression. Ultimately, good art and talented artists survive the introduction of new technology and are actually empowered by it.
Back on the software side of the special effects business, it's interesting to note that a handful of products dominate the industry (for example, Pixar's Renderman and Maya) although each effects house gets its particular competitive advantage from proprietary software. In addition to raw rendering and animation, the production problem is ultimately one of complex workflow, involving a pipeline that starts with the director, artists, and actors and ends with final scenes. Keeping that pipeline filled, especially during post production, is what distinguishes an efficent process from a dysfunctional one (the latter of which gets you reported in Variety and ultimately results in missing box office opening dates).
One parting observation on the connection of software to Hollywood: Steve Jobs founded Pixar and Paul Allen is a major investor in Dreamworks.