In 2002, when Graham Hopper was tapped to head Disney's videogame operations, his bosses gave him a choice: Come up with a dramatic plan to reinvigorate the flailing unit or downsize and focus exclusively on licensing to other companies.

It was far from an obvious choice. At the time, many Hollywood studios were getting out of the games game—Universal Studios, 20th Century Fox, and DreamWorks dumped the divisions they had launched during the digital boom of the 1990s, having learned the hard way that the ability to make successful films and television shows didn't mean squat in the interactive world. Producing quality videogames required hundreds of millions of dollars and years of patience.

Hopper convinced his bosses to hang on—with a small footprint, making cheap games based on Disney Channel fare like Hannah Montana and Kim Possible. Just five years later, that decision has put it ahead of the pack, as Hollywood goes hurtling back into videogames. Paramount and Universal are spending tens of millions of dollars to create a new slate of products, and MTV and Warner Bros. have invested hundreds of millions to build themselves into major publishers.

"If you were to build an entertainment company from scratch today, you wouldn't even question that games should be in it," says Hopper, a dapper South African who spent a decade in Disney consumer products before his videogame stint.

It's not the first time such words have been uttered in Hollywood, but there's a sense of inevitability—for some, perhaps even desperation—this time around. When Hollywood exited videogames five years ago, it was riding high on revenues from DVDs. Today, home entertainment is shrinking, box office is flat, the TV audience is increasingly splintered, and significant internet money remains hypothetical. Videogame revenue, meanwhile, shot up 34 percent last year and has increased 49 percent so far in 2008.

Companies are busily recruiting experienced talent, spending big on acquisitions, and pushing through early failures. Warner Bros. made its first stab at videogames with the 2005 flop The Matrix Online, but has gone on to release a much broader slate—and spent more than $200 million last year to buy British developer Traveller's Tales, maker of the ultra-successful Lego Star Wars games.

Movie-based videogames have a deservedly terrible reputation. Since they're often made on the 12- to 18-month timeframe of a film's production schedule rather than the three years it takes to produce a major console game, and can sell well on the back of a movie's mega-marketing spend, they're regularly amongst the lowest-quality titles on the market. For proof, just check the reviews of recently licensed games like Iron Man and Wall-E."

But even adaptations that sell can tarnish a brand with young consumers if the games stink—something studios now recognize. Universal, not wanting to rush its self-financed Wanted game, hasn't announced a release date yet, even though the film is out. Warner Bros. is turning Watchmen into a series of small downloadable games rather than rush one big package for the film's release next March.