In the years after its invention by the Lumiere brothers in 1895, cinema had rapidly become popular even in distant places like California. "Nickelodeons" (movie theaters) popped up in every city. In 1902 Thomas Tally opened the Electric Theater, the first Los Angeles theater devoted solely to films.

New York filmmakers started shooting movies in Los Angeles because motion picture patents were held by Thomas Edison and were difficult to enforce on the West Coast. It was technically illegal to make movies without Edison's permission, but it was practically difficult to enforce this law in Los Angeles. The city also offered plenty of outdoors for films and the weather was good most of the time, a big advantage over the rainy East Coast for completing a movie in a short time with the primitive equipment of those days.

Harvey Wilcox, a wheelchair-bound polio survivor, and his wife Ida (30 years his junior) arrived from Kansas in 1883, purchased fruit orchards northwest of downtown, named the area "Hollywood" and in 1887 turned it into a subdivision. The name was apparently suggested by his neighbor Ivar Weed, a Dane who had volunteered in the Union army in 1861 and emigrated to San Francisco in 1863 by way of Panama and then bought land in 1870 to start his own ranch, which had a lot of holly trees (hence "holly wood"). Wilcox died four years later but his wife Ida and her new husband Philo Beveridge set out to turn the subdivision into a real town (city hall, library, post office, police station, bank, theater, churches and so on). She donated lots to a French painter, Paul de Longpre', and in 1901 Canadian architect Louis Bourgeois built his eccentric mansion, which became Hollywood's first tourist attraction. Meanwhile, in 1886, the Canadian developer Hobart Whitley, having made a fortune in Oklahoma, had purchased the vast ranch next to the Wilcox land. He moved for good to Los Angeles in 1893, and in 1901 started aggressively promoting Hollywood in the newspapers, in cahoots with Harrison Gray Otis (the owner of the Los Angeles Times), and in 1902 he opened his Hollywood Hotel as a second tourist attraction.

At the same time, in 1900, oil tycoon Burton Green (who had originally moved from Wisconsin to California in 1886 to grow oranges before becoming a co-founder with Max Whittier of the Associated Oil Company) led a consortium that purchased the old Mexican land grant El Rodeo de las Aguas, which was a vast expanse of bean fields. In 1906 he renamed it Beverly Hills and hired landscape architect Wilbur Cook, a former employee of the Olmsted Brothers, to design a new residential area. Instead of the usual grid of straight lines, Cook designed a city of curvilinear streets. Henry Huntington started advertising the new community in October 1906 and in 1909 extended a Pacific Electric line to it, but Beverly Hills failed to attract customers due to the recession of 1907. For a while the only mansion of Beverly Hills was the grandiose one built in 1907 by Myron Hunt and Elmer Grey for Llewelyn Arthur Nares, a banker who had made a fortune with the Fresno Canal and Irrigation Company and also an automotive enthusiast who in 1905 had driven from from Los Angeles to San Francisco in a record 25 hours.

After struggling for a decade, Whitley finally had the right idea for Hollywood: he pitched Hollywood to David Horseley, who in 1907 had established in New Jersey the first independent film production company of the USA, Centaur, and who in 1909 had already opened a subsidiary in downtown Los Angeles, called Nestor. In October 1911 Horseley dispatched an Al Christie to open a studio in Hollywood, the first Hollywood studio. Films had already been shot in Los Angeles, but in downtown, like when in 1907 Chicago film producer William Selig sent director Frank Boggs and cameraman Thomas Persons to the city to complete his adaptation of Alexandre Dumas' "The Count of Monte Cristo", or like when David Wark Griffith had made a movie in Paul de Longpre's mansion. Griffith had even shot a movie in Hollywood, a 17-minute short, "In Old California" (1910); but Nestor was the first studio located in Hollywood. The second Hollywood studio was set up in May 1912 by Louis Burns and Harry Revier in a barn, and that's where in 1914 Hollywood's first feature film was shot: Cecil DeMille's "The Squaw Man", which marked the birth of Jesse Lasky's production company (the future Paramount). Ironically, the citizens of Hollywood didn't welcome the movie business and filed a petition to try and ban it from the region.

In 1911, the producer Thomas Ince purchased an oceanfront and mountain area in the future Pacific Palisades, and set up a studio that quickly became a self-sufficient town, Inceville, featuring stages, shops, offices, a power house, a reservoir, a post office, horse stables and so on, employing about six hundred people. In 1916 a fire convinced Ince to move most operations to Culver City, and Inceville was abandoned when Ince died in 1924.

Encouraged by Burton Green, the hotel owner Margaret Anderson hired Elmer Grey to design a new hotel in Beverly Hills, the Beverly Hills Hotel that opened in 1912, and Beverly Hills began to attract tourists. New wealthy residents included: Harry Robinson in 1911 (heir of J.W. Robinson’s department store), politician Silsby Spalding in 1912 (who would become the first mayor of Beverly Hills in 1926), King Gillette in 1915 (the man who had invented the disposable safety razor in 1903) and John Joyce also in 1915 (the Boston financier who had "stolen" the invention from Gillette). The Nares mansion was enlarged in 1913 by borax baron Thomas Thorkildsen, a man notorious for living a life of excess, and that's the house that Joyce purchased in 1915. Green himself in 1914 moved into a Beverly Hills mansion designed for him by John Martyn Haenke, and his partner Whittier followed suit in 1916 with a 38-room mansion (which 60 years later became a tourist attraction after Saudi sheik Mohammed al Fassi purchased it and added quasi-pornographic decorations).

In 1915 Karl Laemmle, a New York movie mogul who had absorbed Nestor, opened the world's largest film studio, Universal City, a few kilometers north of Hollywood. In 1916 Griffith turned a block of Hollywood into a giant replica of Babylonia for his film "Intolerance". The sky was now the limit for movie productions.

One of the first major screenwriters was a woman, Anita Loos, raised in San Francisco, who wrote movies for Griffith in 1912-13 and launched the career of Douglas Fairbanks in 1916 before being hired away to New York in 1918.

Mack Sennett, the future king of the slapstick, had convinced New York investors to let him open his Keystone Studios in July 1912, where he had launched his very successful "Keystone Cops". He chose a site in Los Angeles, and hired British vaudeville comedian Charlie Chaplin in 1914. Both Chaplin and DeMille had arrived in 1913. Both settled in Hollywood. In 1916 Cecil DeMille bought a Beaux Arts mansion in Hollywood (purchased a century later by Angelina Jolie), the first Hollywood celebrity able to afford such a luxury (Chaplin lived in a small house next to it, a house that DeMille eventually incorporated in his own).

By then, Hollywood had become the movie capital of the USA, and became the movie capital of the world after World War I since the war had crippled the European film industries. The studios that emerged, like Paramount (1912), Universal (1912), Columbia (1918), United Artists (1919), Warner Brothers (1923), Metro-Goldwyn-Mayer or MGM (1924), Twentieth Century Fox (1925) and Radio-Keith-Orpheum or RKO (1928) invented the "star system" which created millionaires out of actors, screenwriters, directors and producers.

In 1918 movie star Douglas Fairbanks purchased a mansion in Beverly Hills (remodeled by Wallace Neff), which two years later he used as a wedding gift to his new wife Mary Pickford (hence the nickname "Pickfair"). They were the most famous couple in the world outside of the British royal family. Soon other stars followed them in Beverly Hills: Charlie Chaplin (who built his 20-room home next to "Pickfair"), Gloria Swanson (who in 1923 purchased King Gillette's home), Rudolph Valentino (who built "Falcon Lair" in 1925), Harold Lloyd (whose super-lavish "Greenacres" was built in 1928 by Sumner Spaulding), etc. Beverly Hills finally realized its founder Burton Green's dreams. And then came other wealthy people, notably oil tycoons like Edward Doheny, whose gigantic 55-room Tudor-style "Greystone" (1928) was designed by Gordon Kaufmann, and Ralph Lloyd (an "independent" who in 1911 had "discovered" the vast Ventura Avenue oil field), whose Mediterranean-style villa (1930) was designed by John DeLario.

By 1920, cinema employed about 100,000 people in the Los Angeles area. Dreamers flocked from all over the world to Hollywood, and tourists came to see the places made famous by the stars.

Hollywood's only rival was the theater, for the simple reason that movies were silent and theater shows were spoken and sung, but in 1927 or 1928 the first "talkie" debuted (depending if one considers "The Jazz Singer" or "Lights of New York" as the first talkie) and cinema became the main form of entertainment. In 1927 Walt Disney invented the cartoon character Mickey Mouse and thus launched one of the most successful products of Hollywood. Also, in 1927, Sid Grauman opened the Chinese Theatre on Hollywood Boulevard, with the famous courtyard of movie stars' footprints.

Hollywood had been a tiny village in 1910 but in 1930 it was a city of 130,000 people. The Oscars were first awarded in 1929. By then, cinema had become the USA's fifth largest industry by revenue.