In recent years, David Lynch has emerged as a tireless proselytizer—of organic coffee, transcendental meditation, and, perhaps most surprising for a onetime celluloid fetishist, digital video. While other veteran filmmakers (Jean-Luc Godard, Spike Lee, Steven Soderbergh) have dipped their toes in the chilly electronic murk of DV, Lynch has jumped right in. "Film is like a dinosaur in a tar pit," he told me when I interviewed him last fall.

Lynch's latest feature, Inland Empire, is his 10^th, and his first to be shot in digital video. The movie was an overwhelming experience on the big screen, a three-hour waking nightmare that derives both its form and its content from the splintering psyche of a troubled Hollywood actress, played by Laura Dern. But the natural home for this shape-shifting epic may in fact be the small screen. Watch Inland Empire on the DVD that came out last week and you sense that this lurid, grubby fantasy springs from deep within the bowels of YouTube as much as from inside its heroine's muddy unconscious. The DV that Lynch has come to cherish is the medium of home movies, viral video, and pornography—the everyday media detritus we associate more with television and computer monitors than movie theaters, more with intimate or private viewing experiences than communal ones.

And not only does Inland Empire often look like it belongs on the Internet, it also progresses with the darting, associative logic of hyperlinks. Indeed, parts of the movie originated on Lynch's Web site, davidlynch.com, itself a labyrinth of wormholes and worlds within worlds. The rare major filmmaker who caught on early to the potential of streaming video, Lynch has been creating short films specifically for an online audience since 2001. One of his more popular Web series, Rabbits, in which a rabbit-headed family recites Beckettian non sequiturs (to the sound of canned sitcom laughter), actually made its way into Inland Empire.

The practice of shooting feature films on video only goes back a decade or so, to the introduction of the cheap, compact MiniDV format. The Dogme '95 movement, led by Danish troublemaker Lars von Trier, kicked off the digital revolution, and before long, DV was the default mode for indie filmmaking the world over. Broadly speaking, the first wave of MiniDV films can be grouped into two categories: those that treat video as a language in itself, with its own expressive potential (the first Dogme film, The Celebration, for instance, or even The Blair Witch Project), and those that attempt to disguise or neglect to accommodate the video-ness of video and use it simply as an affordable substitute for film.

High-definition video, which now often closely approximates film, has become an increasingly common format for studio productions (David Fincher's Zodiac being a recent example). But Lynch is not interested in simulating celluloid with a state-of-the-art video camera. He shot Inland Empire with the relatively primitive Sony PD-150, a consumer-grade model that was introduced in 2001 (eons ago in techie years) at a retail price of less than $4,000. Lynch's love of video has much to do with the freedom it grants. Shooting with a camcorder removes the strictures of a traditional film production, allowing for a smaller crew, less setup time, and no accountability to money men. The lightweight camera, along with the low cost and high capacity of videotape, generally means more and longer takes. Video permits Lynch to indulge fully his taste for improvisation—to make things up as he goes along. Inland Empire was written a scene at a time and shot piecemeal over a period of three years.

But Lynch being Lynch, aesthetic concerns presumably outweighed practical ones. Compared with film, video typically looks harsh and almost hyperreal, with a narrower range of colors and weaker contrast, but it's precisely those qualities that Lynch revels in. While a lower-resolution film stock, like Super 8, has a grainy, romantic allure, lower-resolution video, characterized by fewer pixels per inch, merely looks fuzzy. For Lynch, who has likened low-res video to film stock before the emulsion process was perfected, the murkier the image, the more "room to dream," as he puts it. It's no wonder this master of the enigmatic would prize video for its literal lack of information.

The deeper you get into Inland Empire, the more logical the video aesthetic seems. The bleeding colors and the unstable image are a perfect fit for the fugue state that the movie gradually sinks into. Simply put, Inland Empire is the story of a grave identity crisis. The trouble begins when actress Nikki Grace (Dern) lands a part in a hokey melodrama called On High in Blue Tomorrows. As actor merges with character, and film and reality violently intersect, space and time also begin to fissure. One minute we're in sunny Southern California, the next in snowy, old-world Poland.

Inland Empire shares with Lynch's previous feature, Mulholland Drive (2001), a morbid fascination with the destructive machinery of Hollywood. Both regard acting as a threat to the stability of the self. The earlier film, ingeniously reconstructed from an aborted TV pilot, was a poisoned valentine, ruefully enthralled by the promise and magic of old Hollywood. Inland Empire strips off the patina of glamour. In every respect—from its experimental ethos to its unconventional economics (it was partly self-financed and eventually self-distributed)—the film is Lynch's defiant rebuke to the industry that has never fully embraced him. At one point, one of Dern's characters (she seems to be playing three or four) is stabbed in the gut and staggers along the Hollywood Walk of Fame, leaving a trail of blood.

Video, as Lynch uses it here, is the language of the subconscious, somehow more and less real than plain old filmic reality. DV looks more lifelike than film (its frame rate, the frequency at which successive images are captured, is higher than film's and closer to how the human eye operates), but it also seems unnaturally heightened, since it's not what celluloid-trained eyes are used to.

Lynch started his career as a painter—earlier this year the Fondation Cartier in Paris mounted a show of his photographs, digitally tweaked erotica, and massive, crude, roughly textured oil canvases—and he uses video with the curiosity and resourcefulness of an innate visual artist. He pays attention to its flickers, its shadows, its susceptibility to distortion from under- or overexposure. In this remarkable scene, for instance, he achieves a multitude of textures with an amusingly low-tech flashlight-in-the-dark method.

Bodies and faces, meanwhile, are repeatedly abstracted with an unforgiving lens or light source. Dern fearlessly offers herself up to one disfiguring wide-angle shot  after another. The extreme close-up is a Lynch trademark, and here, using his DV camera like a new toy, he peers even more intently than usual, as if he's stumbled on an entirely different way of looking.

Whether or not Lynch intended it to, Inland Empire in the end conveys a techno-existential insight worthy of William Gibson. Film is a physical process, dependent on the interaction of light and chemistry. Video is by definition more remote, more spectral, a cluster of data in the electronic ether. And while mortality is a defining trait of film, a medium that degrades and disintegrates over time, video—quickly and endlessly reproducible—conjures a spooky sense of the infinite. In Inland Empire, truly a horror movie for the digital age, it's not that the ghost is in the machine. The ghost is the machine.