Why do some movies do well and others don't? There are a lot of reasons. But if we were to simplify, there are 2 things that matter more than the rest.
1. The buzz factor.
Reason why studios pay $20 million to a well known celebrity is because they know it will generate the buzz and create expectations.
2. The story and the experience.
Once the movie is released, and the first wave of viewers go and watch it, then it all depends on how good their experience was - for the buzz to sustain.
To beat Hollywood, you have to become better than them at telling good stories well, and creating buzz that lasts to make money out of it.
You absolutely have to become good at monetizing the buzz. Only selling the movies for 99 cents is a bad monetization plan. You will never be able to fund a movie like Avatar. And if you can't do that, you'll never be able to take on Hollywood.
If I were to develop a plan to beat Hollywood, it would center around creating buzz. How to use the new media to generate buzz.
Maybe create a new incentivized market... a whacky idea like: the first hundred thousand people who watch a movie can share in its profits.