[Aimed at people who are not particularly familiar with SL, not at the original post, who clearly knows SL]
Yeah, played SL a fair amount. It has issues if you wanted to use it this way, besides the legal stuff. Remember that SL is first and foremost a 3D shared world, so every compromise is made in favor of improving the shared experience. Everything else, including 3D quality, takes a back seat.
The current (I think) 3D tech used for characters is "mesh", as it is called in SL. Basically, the so-called "classic" model is masked out, and a new skin is wrapped around a bone structure. There are numerous mesh bodies and heads available in the SL market, with varying degrees of compatibility. The typical problems include discontinuities on the neck line, but those aren't the only ones. Various skins (yeah, skins are yet a separate purchase, and have to compatible with your purchased mesh for UV mapping to work - ka-ching!) have kludges to blur the problems.
There are further purchases (ka-ching, KA-CHING!) that can enable such goodies as bouncy physics, though the quality varies widely.
Oh, and one more thing to note, if you are planning to learn how to create your own assets to fit a particular story, that costs money too (ka-ching-ching-ching)! Basically, each upload to the online server costs in-world bucks (called Lindens, or L$) that you can buy with real world bucks via the SL website. Factor that cost into your design-upload-test cycle.
Or just get assets from in-world stores. Be prepared to spend lots of money though. So much ka-ching-i-ness.
Do people use SL for machinima? Oh yeah, lots. I bet they have workflows that include heavy post-processing in Photoshop or After Effects. But I would think Daz or Daz+Blender would be much easier and cheaper to use, and result in better renders that require less fixup work. It's not that SL tech is inferior as such, but that it is designed to solve a different problem.