In 2009, Oren Peli's low-budget, "found footage" thriller Paranormal Activity came out of nowhere to gross more than $100 million domestically at the box office. Not bad for a first-time filmmaker who made a $15,000 movie in his house in San Diego with two friends and sold it to Paramount for $350,000. Then, as if that weren't enough, a year later, Paranormal Activity 2 earned more than $40 million in its first weekend, making it the highest opening ever for a horror film. With Paranormal Activity 3 coming out this weekend, the question now for Peli and his team of DIY nightmare makers is: Can Paranormal become a perennial horror franchise?

"One step at a time," Peli says coyly when asked.

A typical answer from the Israeli-born video game programmer turned filmmaker who has become known in the industry for his M. Night Shyamalan-like secrecy when it comes to his projects. However, glancing into the inner workings of the Paranormal Activity films — which chronicle the scary videotaped supernatural happenings that occur to the families of two sisters — "one step at a time" is hardly how Peli and his team proceed. In fact, their success is predicated on thinking steps ahead and working in an extremely unconventional manner, even from within the studio system.

A scene from Paranormal Activity
A scene from Paranormal Activity

Found-footage storytelling — which these days most often consists of creating a fictitious story using footage shot with handheld cameras, unknown actors, and a clever backstory to give the impression that what is being shown is real — has grown in popularity in the past few decades, with filmmakers using the style to bring a sense of authenticity to films about everything from school shootings (Zero Day) to the aftermath of September 11 (The September Tapes). But where it has thrived is in the horror genre, and no film better exemplifies this than the sub-genre's landmark, The Blair Witch Project, which grossed more than $140 million in the United States in 1999. Problem is, once you fool the audience with "found" footage the first time, it's hard to fool them twice. Book of Shadows: Blair Witch 2 was a critical and box office failure.

Aware of this, Peli and Paramount Pictures, which has released all the Paranormal Activity films, are attempting to lure viewers into suspending their disbelief by making 2 and 3 as bare bones and realistic as the first one, despite their ability to spend more money.

"When we were test screening the first one," Peli recalls, "the [Paramount] executives asked people in the focus groups why they were affected by the movie, and the answer they got back was always, 'Because it felt real.' So we are fanatical about making sure that everything looks authentic."

This led Peli (who, since directing the first film, has taken on a producer role while also being the grand arbiter of PA's mythology) and his team not only to stick to the found footage aesthetic for Paranormal Activity 2 but also to develop a set of rules, including no traditional shooting schedule and no structured script (though screenwriters are credited, including Disturbia scribe Christopher B. Landon, who co-wrote PA2 and has sole credit for PA3).

For Tod Williams, who took over directing duties for Paranormal Activity 2 after making a traditional family drama, The Door in the Floor, this style of filmmaking was invigorating. "The fact that we had a release date but had no clear idea of what the movie was going to be, that we were going to work with unknowns, experiment, and invent a new way to make a movie at a studio, and that everyone thought we were doomed to fail and be the next Blair Witch 2, that was super-exciting to me," he says.

In fact, when Williams signed on in late March 2010, the only thing the Paranormal team could tell him for certain was that the film would be a prequel and that it would focus on Kristi (Sprague Grayden), the sister of Katie (Katie Featherston), who was the subject of the first film.

"The whole idea of 'can you make a sequel to a found footage movie' was hanging over us," says Jason Blum, who has produced all the Paranormal films. "Oren, me, Paramount, we all had to learn how to produce these movies." Not to mention the First World problem of how to maintain the original's feel on a much larger budget. (Although the success of the first film did inspire Paramount to create a micro-budget arm, Insurge, founded to produce $100K-budget films, none of the PAs have actually come out of that mini studio. The budget for both PA2 and PA3 has been around $3 million each, according to Peli and Blum.)

Resembling a workshop class more than a studio shoot, production on PA2 took place in a house at an undisclosed location in Southern California for five months. Everything from story ideas to what kind of scares could be pulled off were pitched onsite and then shot, assembled in the editing room for critique, and re-shot, right up to the film's October release date.

"The standard lines of Hollywood authority I threw out the window," says Williams about the production. "The entire thing was very, very collaborative." Some of the ideas that made the cut: Paramount head Adam Goodman suggested a scene where the automatic pool cleaner jumps out of the water; one of the most famous scenes, when the kitchen cabinets all suddenly open, was first floated by a practical effects company.

Having successfully averted the Blair Witch 2 curse, Oren and Paramount put PA3 in the hands of directors Henry Joost and Ariel Schulman, who have a knack for messing with our heads. Known in the indie-film world for their Sundance 2010 documentary hit Catfish, which chronicled Schulman's brother Nev's relationship with a girl via Facebook only to find that the girl isn't who she says she is, Joost and Schulman have fielded question after question, including in these pages, about whether their film was real or just a clever ruse. "We've never been ambiguous about Catfish being a real documentary — it is," says Schulman while taking a break from shooting PA3 last month. "I think Paramount was disappointed to hear us tell them that even behind closed doors." Regardless (or because of this), Peli and Blum believe these guys have the credentials to build on the Paranormal mythology.

Paranormal Activity 3 focuses on Katie and Kristi when they were children and shows the origin of the demon that will follow them for the rest of their lives. And in a new wrinkle, the story is set in 1988 — the first real period Paranormal — and everything from the music on the radio to the clothes to the giant camcorders the characters shoot with is authentic to the era.

Like Williams, Joost and Schulman have embraced the Paranormal rules and found the process rewarding. "You can just make up scenes [that] day, try the same scene 10 different ways, and basically the best idea or the best scare wins," Joost says. "We've shot enough footage for five features, and what ends up in the film is the best stuff."

Although Peli is keeping mum on what's next, if anything, for Paranormal, many involved with the films say it's hard not to think there are more in the pipeline. Creating scenarios on how the story can move forward is what has made the films successful so far, Williams says. "It was always on our minds," he admits. "It's what you would do at lunch: talk about what could happen in the next movie."

Says Blum: "I think it's impossible to think about the next movie without thinking about the movie after that and the movie after that. We're thinking about that all the time."

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