Machinima (muh-sheen-eh-mah) is filmmaking within a real-time, 3D virtual environment, often using 3D video-game technologies. (Machinima.org)
In an expanded definition, it is the convergence of filmmaking, animation and game development.
The techniques associated with traditional filmmaking are applied within the virtual space of an interactive computer game. The action that is captured here may be controlled by a combination of human interaction and artificial intelligence.
By combining the techniques of filmmaking, animation production and the technology of real-time 3D game engines, Machinima makes for a very cost- and time-efficient way to produce films, with a large amount of creative control. (Machinima.org)
History:
The earliest roots of Machinima can be found in the Demoscene, a computer subculture that became established in the 1980s. The Demoscene demos are non-interactive software programs containing graphics, music and visual effects animated in real time. The technological basis for demos is similar to computer and video games, and early demos could even use elements, such as music and sprites, that were directly copied from games. Unlike Machinima, however, demos are nearly always stand-alone programs that are preferably created from scratch. (Wikipedia - Machinima)
In 1992, the game Stunt Island was released, which allowed users to create movies by placing props and cameras, flying stunts, and splicing together takes. Communities emerged on CompuServe and the Internet, where users of the software were able to trade props and movies with each other.
When Doom was released in 1993, it included support for the recording and playback of gameplay demos. This resulted in the eventual creation of Doom speedruns, where players recorded rapid traversals of Doom levels. Machinima per se arrived with the advent of true 3D game worlds and controllable cameras, from late 1993 to 1996. The 1993 Star Wars game X-Wing featured a limited recording feature with a controllable camera system, but the camera was controllable only during playback of recordings, not during gameplay itself. While Quake is commonly credited as being the first to introduce these, MechWarrior 2 can be attributed with the innovation. This was published a year prior to Quake and possessed most of the same capabilities. Nevertheless, the popularity of the Quake engine saw the rise of its Machinima - termed “Quake Movies”. The first movies appeared in 1996, and the term was coined at the start of 1998. Around about mid 2000, this Quake community died out somewhat, due to the movement of players to newer games. (Wikipedia - Machinima)
Things picked up in the following two years or so, however. With the improvements in 3D game engine technology many developers added in-game cut scenes to their games. This led to improvements in animation capabilities and soon most game engines had the functionality (although often available to the developers only) necessary to produce machinima. (Wikipedia - Machinima)