"Films on demand" - some aspects of this are near-future plausible given existing script, mocap and voice acting. Simple programmatic cinematography is just about possible, and AI editing is getting better. 5 years away, maybe, for sitcom / soap-opera equivalent lighting and cinematography. A LOT longer before you're replacing Roger Deakins, though.
"Photo-realistic" - photorealistic CGI films have been just around the corner for 15 years now and continue to be so. Proof-of-concept 15 second renders are doable, feature-length films with non-humans are doable (albeit with a LOT of human intervention), but 90 minutes of CGI humans is a lot harder.
"Characters" - moulding their appearance is almost doable now. Motion is a lot harder - we've got semi-programmatic facial animation but it's a bit rubbish. Programmatic body animation is getting there. Programmatic voice acting is a Really Hard Problem and I'm not aware of anyone making any significant moves forward in that area.
"Unique scripts" - no-one has demonstrated anything close to an AI scriptwriter at this point. It may well be that's a problem which requires strong AI to solve.
We might be looking at Hollywood being replaced completely at some point, but I doubt it'll happen in the next 20 years.
However, what IS a huge threat to Hollywood is the increased power of indie filmmakers with technological assists. I write about that sort of thing over on my blog at http://www.strangecompany.org/blog/
One filmmaker today can do things that would have required a crew of 20 back in 1993. The cost of filmmaking is plummeting. And that certainly is a threat to Hollywood.
Discoverability and marketplaces are the key problems for film at the moment. There are other groups working on that problem, but so far it remains unresolved.
I wrote a bit about this on Charles Stross's blog a while ago - http://www.antipope.org/charlie/blog-static/2015/06/hugh-han...
You're vastly underestimating the work that goes into an authentic hollywood movie.
Also, vastly overestimating the quality of video game 3d engines, the performance requirements, the potential plot quality resulting from player-driven storylines, and so on.
Even looking at The Witcher 3 running at its highest settings, the human characters are not photo-realistic. The game itself doesn't look like something that was captured on a camera; the output includes blur filters that look impressive but unrealistic (Toy Story isn't a good measuring stick, since it's not trying to be photo-realistic; something like the 2007 Beowulf movie would be a better comparison against live-action).
The biggest games aren't as profitable as movies today. Right now, there's about 35MM consoles capable of playing The Witcher 3 (PS4 and X1). Avengers: Age of Ultron passed $1 billion this summer. For TW3 to match its sales numbers, they'd have to sell roughly 16.7MM copies at $60. Almost half the number of console owners would have to buy this game at full-price for it's revenue number to be the same (yes, the PC market will have an impact, but that's harder to measure, but that market tends to be smaller than the consoles).
Moving up the timeline is meaningless toy story was 20 years old so the point is game year x ~= movie x - y. Means games in y = in ~20 years top games = today's movies assuming steady exponential growth. Which probably does not hold long term, but if today’s movies are ‘acceptable’ then that’s all you need.
Games are struggling to match the offline renderings of 14 years ago. https://www.youtube.com/watch?v=xaI7ZPA9I1c - in particular pay attention to the lightning and textures, less so the animations. Especially those off in the distance, something that games continue to struggle with in a big way.
Photo-realistic video games are very, very far off. Significantly the costs required to achieve high-end graphics these days are astronomical.
Lucasfilm is already experimenting with using video game engines for their film making.
Would Star Wars fan want Oculus Rift + Haptic Bodysuit + Star Wars world with full ray casting and realistic models?