An early sequence in the Hellboy II movie (blogged below) has a story-telling flashback to "magical times" done entirely in CGI... but with
puppets. This was done for budget reasons, but it works really well, and I think they may have invented a new medium of sorts.
Think about it, when doing puppets in CGI you get all of the charm of puppetry, but without the limitations that gravity and physical space impose on real puppets. And then you have all of the freedom of CGI, but at less cost because puppets don't have the complexity of muscles and semi-translucent skin, etc etc.
It would be a clear step down from full CGI movies if it was not for the interesting fact that puppetry has a centuries-old tradition, everybody has seen puppet shows/TV-shows/films from childhood and we are trained to react emotionally to them. So I think that this could really work if somebody put their mind to it.
It would be like a Tim Burton puppet movie, only much more alive and without all the f***ing
singing puppets. :-)
(But seriously: a puppet
musical??
Twice??)