AD has come across an article at GamesRadar titled "Tracking the Sordid History of Interactive Movies". By 'interactive movie', they mean 'film shoot' - forgetting that the former label was originally created to refer to games like Wing Commander II and System Shock. Oddly, Wing Commander (the series that popularized both items) is touched only only briefly:
With or without controversy, interactive movies were doomed from the outset, and big-budget titles like Wing Commander III stuttered under the weight of their own ambition. Robert Paulsen explains: “It wasn’t so much that the genre failed, but that technology failed the genre. The ideas were just too far ahead of the technology. The budgets for these games got bigger but the end result was always the same - CDs couldn’t hold the information needed to give the games good video quality and true interactivity.”
The general conclusion seems to be that FMV is down but not out - a few modern attempts could bring it back. Command & Conquer 3 is proof of that! You can read the entire article here.