(FORTUNE Magazine) – Now that the masters of hype have decided they can't make online films fly, Internet entertainment executives are wondering who can. Earlier this month two of Hollywood's most cutting-edge studios--DreamWorks SKG and Imagine Entertainment--folded their joint venture, Pop.com, before it even launched. Few entertainment sites had such illustrious backers: Paul Allen poured in $50 million; Steven Spielberg and Jeffrey Katzenberg of DreamWorks and Ron Howard and Brian Glazer of Imagine invested undisclosed amounts. Leveraging their film contacts and acumen, the founders planned to produce and distribute original short films on the Web. Their goal: making Pop.com the Web's answer to the Sundance Film Festival.

Officially Pop.com executives blamed shaky market conditions. However, observers say the site's founders underestimated the difficulty of building the business; the big-name backers were too busy with other projects to get directly involved. (Spielberg et al. were mum.) Meanwhile Pop.com burned through $10 million and repeatedly missed its launch dates. By summer the founders were looking to sell their shares. They found no takers.

Analysts say Pop.com's failure doesn't doom the Web film business, but the industry isn't going to take off for another few years. "Online films are dependent on technological innovations like broadband that aren't widely available yet," says Jim Penhune, an analyst at the Yankee Group. In the meantime, the first entrants, like AtomFilms, will continue to dominate this nascent market.

--Dimitry Elias Leger