Even with a huge budget, a film this effective would be classified as brilliant. That being said, and considering its minuscule budget, "Paranormal Activity" might very well drift into the category of masterpiece. Clinging to the notion (the correct notion) that good horror shows audiences very little of what goes bump in the night and lets their imaginations fill in the rest, this film elicits some of the most consistent and sustained crowd reactions I've ever experienced in a movie theater. Gasps, shrieks, and screams-- all provoked with a bare minimum on screen used to startling effect. The slow build is quite literally breathtaking and the actors so convincing that within ten minutes I was sold that these were real home movies hook, line, and sinker.
Keep in mind the conditions under which I saw the flick were perfect: large, mostly respectful crowd; perfectly centered seats; cool fall evening; great sound. All of these factors can and often do ruin a movie-going experience when not up to snuff. Granted, there was the occasional checking-of-the-cell-phone-for-a-text-message from the row in front of me, something I handily covered with my crossed leg (idiots can't always be avoided), but other than that, and especially once the tension began to ramp up, the film had most of the audience like hedgehogs in a lawnmower.
How is the tension managed? Largely through the clever cycling of night and day scenes that slowly begin to blend. Once you believe these characters are real, you come to like Micah and Katie. The nights are so suspenseful, due to static shots of the couple sleeping in a darkened bedroom and some brilliant sound mixing, that when day scenes occur they start to act as a relief. Humor is infused (largely thanks to Micah) as the couple plans to deal with their demonic problem and a sense of hope is achieved-- only to be quickly ripped away as the film moves into another night sequence (complete with numeric tag and timestamp).
As the movie progresses, these times of relief and hope are incrementally stripped away until the audience is left feeling just as trapped by the movie's nighttime terrors as the main characters. Sure, we can get up and leave the theater if it becomes too intense, but there's always that glimmer of faith that things might turn out all right for the likable heroes. The thing we don't want to acknowledge is the fear that this film generates: that even when we do leave the theater, the experience might not really be over.