I would say Machinima simply filled the needs and there was no need for these kind of games to be developed on top of it. Just using existing game engines with a decent editor would always be cheaper and more popular since people are familiar with the assets. Just take a look at how many Team Fortress "movies" are out there.
And even without editor using games was fine. World of Warcraft had a ton of videos as well.
Tools for Machinima also saw the gradual advancements you talked about. While the initial movies produced had a lot of workarounds to get a decent end product there is now dedicated software for it. NVIDIA recently released their own version.
On top of that with smartphones having cameras now, kids can always shoot their own movies.