(FORTUNE Magazine) – Last week I sat in a packed movie theater watching a horror movie. Now, there's nothing especially unusual about a crowded show--except, perhaps, that it was 12:30 on a Tuesday afternoon. And that, on the way in, I'd passed a line of people who were already waiting in the hot Los Angeles sun for the 2:30 show. And then there was this: The movie we were there to see had no major stars and had cost all of $60,000 to make. Its title, of course, is The Blair Witch Project, and it grossed $1.5 million in its opening weekend, playing on just 27 screens--which averages out to an incredible $56,002 per screen. (By comparison, that weekend's No. 1 movie, Eyes Wide Shut, had an average of $9,003.) Where the average studio film today costs at least $25 million to market, Blair Witch is an example of how canny positioning, clever publicity--and, yes, a good movie--can rival any studio juggernaut.

The Blair Witch publicity machine began revving just after midnight on Jan. 24 at the Egyptian Theater in Park City, Utah. It was there that the film, a faux documentary about three student filmmakers who disappear while making a movie about a legendary witch, screened to an enthusiastic response at the Sundance Film Festival. After an all-night bargaining session, it sold, reportedly for $1 million, to Artisan Entertainment, a privately held independent-film distributor. According to Artisan's co-president, Amir Malin, that same day he, his co-president, Bill Block, and his marketing chief, John Hegeman, sat down at their rented condo with Haxan Films, the five-person production team behind the film, to sketch out a marketing plan. The Haxan crew had already put up a Website at www.blairwitch.com; Malin says, "Our feeling was that that Website could be expanded and could be one of the focuses of a marketing campaign."

Over the next six months the Website grew to include documents and video clips, all of which maintained the film's poker-face illusion that the events it depicts are real. Meanwhile, Artisan employed a number of low-budget publicity tactics; Malin estimates that prior to the film's July 14 release, Artisan had spent only $1 million to promote the film. Rather than buy costly network ad time, the company screened the movie on college campuses and co-produced a special on the Blair witch with the Sci-Fi channel. These low-key approaches helped foster the belief among audience members that they'd discovered the film for themselves--a belief that, in turn, fed traffic to the site.

The weekend the movie opened, Artisan took out a full-page advertisement in Variety. Such ads traditionally tout a movie's opening gross; this one was slightly different. "Blairwitch.com," it read, "21,222,589 hits to date." Geoffrey Gilmore, the co-director of the Sundance Film Festival, says, "I've never seen an advertisement, ever, in which a company takes out a Variety ad about the number of hits to their Website. That says something about how the campaign for this film has worked.... They've really made people get involved with a sense of wanting to be involved with this film, wanting to be a part of the feeling around it."

Not that Artisan made it easy for people to actually see the film; with the movie opening on so few screens, shows began selling out days in advance. Malin says it was all part of the plan: "It's a difficult ticket to get, which was part of the concept," he says. "People do have the experience of going and not being able to get in.... What we're doing is creating that buzz factor on the film. If you want to be in the know, if you want to be in the right place at the right time, you should be seeing Blair Witch." As film critic Roger Ebert notes, this also helped the movie in the press: "Had they opened the movie wide," he says, "Eyes Wide Shut would have been in first place that weekend, and Blair Witch would have been second or third.... Now they're able to say, 'Eyes Wide Shut opened at No. 1, but The Blair Witch Project is a sleeper success.' " With this release strategy, Artisan has created a lot of pent-up demand to see the movie when it expands to 800 screens on July 30 and to even more screens on Aug. 6. Facing this prospect--and the fact that Artisan plans to spend up to $10 million on a publicity blitz just before the movie's wide release--both Universal and Warner Bros. have shuffled their schedules, at least in part, to move films away from Blair Witch.

Malin is already planning for Blair Witch spinoffs and sequels; the first of the merchandising has already hit, in the form of a Blair Witch comic book, "companion book," and soundtrack. (That last item is a bit odd; the film doesn't contain any music. "It's music inspired by the film," Malin explains. Oh.) All this means that The Blair Witch Project could well be the first franchise horror film shot largely on cameras available at Circuit City--which raises a scary specter. Looking at the rewards reaped by the movie, plenty of folks with videocameras will no doubt attempt to emulate it. Next year Sundance's Gilmore could be wading through stacks and stacks of Blair Witch wannabes. "Films work not simply because they're an aesthetic, but because of scripts," Gilmore sighs. "And anything that makes it easier to make bad scripts is something you don't want to see."

--Tim Carvell