I'm working on a new, much longer interpretation, so I'm going to draw from that for a lot of this. You'll just have to trust me that a lot of my ideas are supported by evidence, even if I don't write it all out here.
There's evidence to support that many of the events in IE have been a reoccurring cycle; Kingsley mentioning "if we all play our part, this could be the one" and "this is a star maker if I ever saw one", as well as the seemingly frustrated silence of him and Freddie when they sit down at the script reading (like they're having to start things all over again). Also, we see the Visitor again at the end of the movie pointing to future Nikki, but this time the story's been resolved and she's at peace instead of starting the series of events over again.
I agree. Even on a surface level, we see that the events playing out in Nikki's life are essentially a new cycle of the events in Lost Girl's life. Axxon N. ("the longest running radio play in history") is crucial here. I like to think of it as an eternal system of lives, repeating, but with "variations" as Visitor #1 puts it. In Lynch's metaphor here, stories = lives.
I've never seen someone bring this up, but there's a fairly subtle recurring motif of the window from Smithy's house. If I remember rightly we see it 3 times; briefly overlaid on the Axxonn intro, (obviously )when Nikki invades the set and enters the house, and when Nikki/Sue looks up to see herself. This strongly suggests that there are 2 mirrored/alternate 'realities' at play. I'm almost positive that the Nikki/Sue we see with the prostitutes and doing the silk/cigarette trick is different to the one we see playing out scenes from the film. Smithy's house also backs this up - one version of the house seems to be genuine and the other seems to exist outside of reality (think the Red Room from Twin Peaks).
I don't want to spoil my full answer for this, because it's my favorite chapter of the thing I'm writing. But essentially my view is that ghost-Sue is a time traveler. That's not so much "alternate reality" as a fluid way of observing and learning in this strange pseudo-spiritual space.
This is basically how it happens. Going from memory, so hopefully this is correct:
(1) In the alley behind the marketplace, Sue (ghost-Sue) enters the Axxon N. door. This is a magical door that takes her back in time. Axxon N. represents the time cycle/continuum, so of course it makes perfect sense than an Axxon N. door would be able to take you through time.
(2) Sue emerges in the set. She sees the earlier version of herself, not yet awakened. Her intrusion on this set helps awaken the previous earlier of herself.
(3) Earlier Sue (still a ghost, still naively going by Nikki) gets curious and suspicious and the reality of her world starts crumbling.
(4) She eventually gets curious enough that, while in the alley behind the marketplace, she passes through the Axxon N. door. See #1.
In other words, this is literally a time loop.
Speaking of the set, there is definitely something significant about the mysterious room in the hallway. We see Smithy go in there with his green jacket once, we see Nikki/Sue enter there before confronting the Phantom, we see Lost Girl exit out of it and we see Nikki/Sue enter it in MTTH before ending up back outside the house. There is also definitely something up with the final Axxonn room we see before Nikki/Sue confronts the Phantom. Watch the scene carefully: Nikki/Sue enters the door and appears in Smithy's house, she then goes through the mysterious hallway door (notice how it goes slow-motion at this point), the camera pans slowly to the right, the lights change colour and then Nikki/Sue reappears back in the Axxonn room. Notice how an unreasonable amount of time has passed on the Axxonn room clock while this happens. Weird, huh?? I'm certain that this is some clever misdirection and there are actually 2 Nikki/Sues walking around (no idea which one's which); 1 enters the mysterious door to where the Lost Girl is and the other one enters the Axxonn room a bit after (entering the room from the right) and goes to confront the Phantom. This explain the doppelganger on the Walk of Fame, the weird mirror scene mentioned earlier (where Nikki/Sue looks up to see herself) AND how Nikki/Sue ends up in 2 different places at the end for seemingly no reason (one in the Rabbit room and one in the Lost Girl's room).
To your first point, if I understand this correctly, that room is important because that's where the Phantom-killing gun is kept. It's made very clear to Sue how important this room and this dresser is, because she will need to retrieve that gun.
I'm still not entirely sure what the deal with Doris is. When she approaches Nikki/Sue on the Walk of Fame she's clearly unarmed and unhurt, and when she stabs Nikki/Sue the screwdriver is left behind. So how exactly did she end up stabbed, herself? I propose she's either stabbed by the 2nd Nikki/Sue or this is just some shoddy continuity on the film's behalf.
This was very intentional, in my opinion. In symbolic fashion, Doris has that screwdriver in her gut because she was stabbed by it in her previous life, by Lost Girl, in her apartment. See my posts
on this page.
(Also addresses your next point.)
Speaking of which, the 2 people with blurred-out faces at the start of the film and definitely not the Lost Girl and the Phantom. The voices and actors are different (credited just as "Man" and "Woman" or something if I remember rightly). The hotel room of the Lost Girl has modern decor (notice the absence of the TV in the black and white scenes).
I don't have strong opinions on this. I would agree that that's definitely not the Phantom. But I might argue that it is Lost Girl in that scene (played by a Karolina Gruszka body double, perhaps) going by her body type. For that matter, it might has well be a similar version of these characters from a previous life/time. The connection is there, so it ultimately doesn't matter too much.
The Rabbits take on a similar role to the spirits in Twin Peaks (Firefighter, Mike etc), seeming to be pulling the strings of the events throughout the film. They laid a trap for the Phantom ("bring the horse to the well") which allowed Nikki/Sue to kill him. This would suggest he's a kinda rogue spirit, much like Bob in Twin Peaks. They also grant him permission to enter the physical world at the start of the film ("I'm looking for a way in").
I like this a lot and strongly agree with you here. I have also always seen the rabbits as being helpful to Sue's journey.
Regarding Smithy, it's made clear that he's under the employment of the Phantom, but what does he do exactly?
In one life, he worked for the circus taking care of the animals, while the Phantom was the ringleader. So in that sense he did literally work for the Phantom. The rest of this question is addressed in my analysis. But you'd have to agree with me that there are two sets of lives in this film, as I lay out there.
If we're to assume that MTTH is canon then it seem like the Lost Girl ended up damned by buying the watch from the Phantom.
Yeah, it is a major question how canonical those bits actually are. Some do seem like things that definitely happened, others seem like stray possibilities that did not actually occur (and contradict what's in the film), and others are somewhere in between.
