Given a choice between the Paranormal Activity and Avatar models of filmmaking, Hollywood is likely to make more Avatars. Whether the long tail will wag the dog is still in question. There was a 2008 Harvard Business School study which proved that the importance of blockbusters is magnified by the Web. It would be foolish to dismiss this study because it proves the power of web marketing. I think that the market will fracture as the web allows niche movies to increase their dominance. Consumer attention spans and involvement could eventually limit growth. The keys to success in the long tail of movies are marketing and competitive advantage. Movies that cost under 500,000 can be shown on any website that plays video because there is no risk to free distribution. We'll be lucky to see an Avatar-sized movie on the web due to the risk of piracy.
(This was my response to the title question when it was posted on Facebook. I'll be expanding on this in the near future.)