More comments from Remedy:
Since this keeps popping up every time the cutscenes are discussed, let me try to give a bit more thorough answer even though it's not my area of expertise. We could've done the cinematics "realtime in-game" -style too if we would have wanted to but there's a few good reasons why videos (rendered with the game engine, of course) were a good choice for us:
We can do the editing in a software that's dedicated to it instead of building some sort of editing and camera management system in our own toolset. We have our own engine so we don't always have the luxury of using pre-existing tools.
We can do transitions like crossfades (which are notoriously difficult in real time graphics since basically you would need to render the picture twice and blend them together).
We can do post-processing on the video if needed without the need to implement said effects in the game engine. That being said, the post-processing capabilities of our engine are pretty awesome but it can be a bit silly to do additional features to the graphics engine if said features are only to be used in some cutscenes. It's not economical for a company of this size.
With video, we are not limited by the streaming of the game world. Terrain, objects, characters, textures etc. need to be read from the DVD into the memory before they can be displayed. With video, we can do cutscenes that show several distant locations in a quick succession without us having to worry about the time it takes to stream in a new location.
And as previously mentioned, we can do things like streaming in a completely new game location while the video is playing so the player won't see any boring loading screens when we want to switch the location.
We can pretty much ignore most of the potential memory or performance issues with the hires characters and textures when using video. It's much much faster to produce hi-resolution content when you don't have to worry about making it optimal.
And runtime memory is very precious. If we can avoid keeping hires characters in the memory, we can make rest of the game look better.
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I hope this clarifies our choice of going with videos instead of "in-game" cines a bit. And I do stress that it is a choice: what works for Alan Wake is not the right approach for many other games. We chose videos because it was a better option for us (meaning Remedy and you, the players) because it results to a better looking game (both the playable bits and the cinematics) and less work for our programmers and artists. Of course videos are not an entirely problem-free approach either but game development is full of choices like these.
