(FORTUNE Magazine) - Shari Redstone is holding court in the lobby of a movie theater in Millbury, Mass., rattling on in her usual Gatling-gun staccato.

The daughter of 82-year-old supermogul Sumner Redstone and president of National Amusements - the family-owned theater business that also holds controlling stakes in Viacom (Research) and CBS (Research) - she's proudly showing off one of her company's newest emporiums, when all of a sudden she stops cold and points.

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A history of the silver screen: Part I, The curtain goes up From the turn of the century to the post - World War II boom, the movie biz dominated mass-market entertainment in America. --By Corey Hajim, Source: MPAA 1896 Thomas Edison's motion-picture invention, the Vitascope, is exhibited for the first time. 1926 "Don Juan," starring John Barrymore, breaks the movie sound barrier with the first fully synchronized score. A year later "The Jazz Singer" boasts the first synchronized dialogue. Critics in London carp that the "sound accompaniment spoils the story." 1930s To lure moviegoers during the Depression, theaters offer everything from door prizes (diamond rings, fur coats, even free funerals) to cow-milking contests. 1939 "Gone With the Wind" premieres in Atlanta. Theaters implement a price increase because the length - three hours and 40 minutes - means that it is shown fewer times a day. 1946 Fueled by the appeal of newsreels, movie attendance hits four billion - yes, billion - tickets sold. That's 28 tickets per American. 1952 Humphrey Bogart in "The African Queen" edges out Marlon Brando in "A Streetcar Named Desire" to win the Academy Award for Best Actor. Says Bogey in his acceptance: "It's a long way from the Belgian Congo to the Pantages Theater." It is the last untelevised Oscar ceremony.

History of the silver screen: Part II, The peril of the boob tube With the broad popularization of television, moviegoing gets slammed - and theaters are forced to reset their expectations. Sources: Box Office Mojo; CEA; MPAA; U.S. Census Bureau; NATO 1956 An L.A. television station airs the film "Thirty Seconds Over Tokyo" on a Friday night, and a local movie-theater executive measures a 25% drop in attendance. 1958 The number of drive-in theaters in the U.S. peaks at 4,063. Ten years later the figure drops to 3,690. Today fewer than 650 drive-ins survive. 1960 Ownership of at least one TV reaches 87.3% of U.S. households. 1972 The nascent cable-TV business breaks new ground with the founding of HBO, which buys rights to recent movies and offers them to cable subscribers for a flat rate of $6 a month. 1973 Movie attendance hits bottom, with only 865 million tickets sold all year - the equivalent of four per American, or one-seventh of the rate at the industry's peak. Still, theaters' revenues continue to climb, thanks to rising ticket prices and concession sales. 1975 The age of the blockbuster movie is ushered in by "Jaws'" $260 million box office. Two years later "Star Wars" ups the ante, with a record-setting $461 million in ticket sales. 1982 "E.T." almost matches "Star Wars" at the box office - $435 million - cementing Steven Spielberg as one of the most successful directors of all time. 1985 The TV empire strikes back; 11 million VCRs are sold. Some 18% of households have at least one. The same year David Cook opens his first video-rental store, which later becomes Blockbuster Entertainment.

History of the silver screen: Part III, From megaplex to meltdown Theaters turn to supersized complexes as an antidote to TV, but overdevelopment proves disastrous. Will a new Holy Grail emerge in the face of TiVo, high-def, and on-demand? Sources: Box Office Mojo; MPAA; Display Search; Kagan. 1995 AMC opens the first megaplex theater, an "entertainment destination" in Dallas with 24 screens, located next to a slew of restaurants on the site of what was a declining technology park. 1998 Director James Cameron proudly proclaims, "I am king of the world!" when his 1997 movie "Titanic" wins 11 Oscars, including the Academy Award for Best Picture. With $600 million worth of tickets sold, "Titanic" is the top-grossing U.S. film of all time. 1999 NetFlix launches its subscription DVD movie service, featuring unlimited rental time and mail-in service. 2000 The number of movie screens in the U.S. reaches 37,396, up 58% from 1990. Overbuilding leads companies like Carmike Theaters to file for Chapter 11, followed by Edwards, Regal, Loews Cineplex, and United Artists. 2003 Pixar's "Finding Nemo" rakes in $340 million at the U.S. box office. Yet the film's DVD and VHS revenue eclipses the theater gross, at $485 million. 2005 Apple introduces the video iPod and announces a deal with Disney that allows users to download television episodes. DVD sales continue to explode in the U.S. - 1.1 billion are sold - and consumers snap up 7.2 million flat-screen TVs.

"Look," she says in a Boston accent that would make Cliff from "Cheers" proud, "it's ahr mah-tini bahr!" And though it's just past noon, Redstone insists we go in and sample the merchandise. After a belt or two I mention that this might not be a bad place to frequent on a Friday night, which of course is exactly what she wants to hear.

Cocktails are just one facet of Redstone's meta-strategy to transform moviegoing into what she calls "premium" entertainment. She has also dreamed up "chocolate bahs," screenside waiter service, and high-end food. She's already showing live broadcasts of baseball games - make that Red Sawx games - with kids walking up and down the aisles hawking peanuts. Meanwhile, other operators are renting out theaters to FORTUNE 500 companies for meetings or even to churches for religious services.

It's all part of a mad scramble by theater owners to keep their venues relevant (and full) in our increasingly digital age.

"It's an interesting time to be in the movie theater business," says CEO Steve Marcus of Marcus Theatres, a 500-theater chain out of Milwaukee. "But I don't sleep as well as I used to."

For much of their 100-year history, movie theaters were the exclusive venue for Hollywood to exhibit its glittery wares. In the heyday of moviegoing, which stretched from the grand urban palaces of the 1920s through the quintessential 1950s drive-in, theaters were the ultimate escapist destination. For less than a buck you were swept into another world (replete with air conditioning, buttery popcorn, and if you were lucky, a date) that the phonograph or radio couldn't come close to approximating.

Back in 1946, buttressed by the appeal of newsreels, movie theaters sold some four billion tickets in the U.S., at a time when the total population was 141 million. That's 28 movies a year, on average, for each and every American.

But in the 1950s television began to gnaw away at movies' stranglehold on entertainment, and by 1973 ticket sales fell to 864 million. While attendance has climbed since - to 1.4 billion tickets last year - it still pales in comparison with old times. With the U.S. population now around 300 million, the average American goes to the movies less than five times a year.

The simple fact is that today theaters are less singular than they have ever been. The business is under assault from so many fronts that exhibitors (as theater owners are called) almost don't know whom to shoot back at: home-theater sellers like Best Buy (Research), black-market distributors of pirated films, online movie downloaders, movie studios that spit out cookie-cutter sequels while shortening the wait for DVD releases, and of course endless new forms of digital entertainment, from iPods to YouTube to video games.

While some operators continue to thrive - buoyed by ever-rising ticket prices and profitable concessions - there is no way a smelly, threadbare theater with scratchy sound can survive in this environment.

Redstone, with her cocktail lounges and other coming attractions, and her cohorts at the other big chains like AMC and Regal Entertainment are all grasping for a Holy Grail - a way to remake moviegoing into what it once was: an experience unlike any other. Redstone, 51, remembers when she first described the concept of a newfangled, high-end movie theater to her father.

"He was asking me these questions, and I knew he just didn't get it. Finally I said to him, 'Look, do me a favor and don't even talk to me about it until I finish one.' Then he saw one and phoned me right away and told me, 'I get it.' "

What Shari Redstone is referring to is what she calls a Cinema De Lux (or CDL) theater. National Amusements now has 11 of them in the U.S., and Redstone says she ultimately plans to convert half of her 1,000 or so domestic venues.

The 14-screen CDL megaplex in Millbury (just south of Worcester) where I met Redstone looks at first glance like any other suburban-mall theater. But starting with the martini bar - a concept Redstone conceived while on vacation in the Maldives (towns like Millbury aren't exactly bursting with martini bars) - and moving into the center lobby, where a baby grand piano sits next to a virtual soccer game for kids, you begin to think otherwise.

Along with traditional concessions, there's a mini Ben & Jerry's and a Starbucks (Research). There's a lounge with comfy couches and end tables stacked with newspapers and magazines. A concierge desk assists patrons who need a taxi or help purchasing tickets. The theater also houses two private-function rooms that are available for birthday-party rentals and other events.

And then there are the theaters themselves. Two are what Redstone calls "director's halls," fitted with Ultra Leather rocking recliners, reserved seating for all performances, live intros before showings, and escorted seating service. In some CDL theaters, liquor may eventually be served screenside. (Talk about the Holy Grail!)

"We are trying our hardest to get people out of the house to see a movie," Redstone says. "We simply must give people an experience they can't get elsewhere."

Yes, the theater business survived the body blow of television, but what sort of shape is it in today?

Doomsayers suggest the business is in an irreversible decline and point to the fact that ticket sales have skidded three years in a row - a slump that hasn't happened since the '50s. Defenders say the business has been taking punches for decades from new competitors like HBO, DVDs, and home theaters, and will continue to motor along. This most recent decline, they say, is just another cyclical downturn due to poor product (can you say "Bewitched" and "The Island"?), and in fact, this year through May 9 the box office is up 5.4 percent.

"It's unlikely there's a permanent downward decline," asserts Mike Savner, an analyst with Banc of America Securities. "International box offices were far worse than the U.S. [the past few years], which is important," he explains, " because the penetration rates outside the U.S. for Internet, video games, and home theater systems are all significantly lower than in the U.S. So [bad] product has the most to do with it."

It's hard to imagine that at one time movie theaters were so lucrative the feds had to step in and break the party up. When the movie business started a century ago, studios quickly realized they were ignoring a valuable profit center by letting other entrepreneurs exhibit their films.

The solution was pursuing vertical integration, and by the 1940s the Big Five studios controlled most of the country's theaters. The government sued on antitrust grounds, and in 1948 the Supreme Court ruling in United States v. Paramount Pictures forced the studios to divest.

The single-screen downtown theater, which dominated the business for 30 years, eventually gave way to the suburban multiplex, which in 1995 begat the first standalone megaplex. Located in Dallas, AMC's Grand 24 (screens) wasn't attached to a mall but instead was designed as a destination unto itself. It was extremely successful - yet as it turned out, that sowed the seeds for yet another disastrous era in showing movies.

"We had such a terrific run for much of the 1990s," recalls Redstone. "The movies were great, attendance was up, and it began to attract financial players. Developers were building like crazy, and they would tell you if you didn't put a theater in their complex, they would find someone else, which drove up rents. So not only did the business become overbuilt, but many operators had economic models that couldn't work."

From 1990 to 1999, the number of movie screens in the U.S. rocketed up 57 percent, to more than 37,000. Yet the number of tickets sold climbed only 20 percent.

That disparity caused the industry to go splat, with six major chains, including Regal, Carmike, and United Artists, filing for bankruptcy as the century turned. (Of the bigs, AMC avoided Chapter 11, as did privately held National Amusements, which owns much of its real estate.) Some 2,000 screens were soon shuttered. Balance sheets were eventually shored up in a wave of consolidation that has seen some 12,000 screens change hands in the past four years alone.

Did the crash of 2000 spell the end of the megaplex? No, though the newest giants, like Redstone's CDLs, could be called postplexes because of all their new features. Size still matters, says David Brain, CEO of Entertainment Properties Trust, a REIT that develops theaters.

"It's really not that different from the retail category, creating selection at a single location," he says. "That's why Americans shop large-format retailers, and we are conforming to that."

In those 18- to 24-screen complexes, multiple theaters show hot new releases to give the convenience of varying starting times.

"It's the same reason that you go to Linens 'n Things for towels," says Brain. "You get every color, every size, every weight. You get what you want when you want it."

Like Redstone, Brain sees exhibitors stepping up concessions, a model that works especially well when you're serving 4,000 to 6,000 people a day, which is what those complexes are bringing in.

Developers are beginning to look at locating theaters in tandem with restaurants, bowling alleys, and skating rinks too. Exhibitors are experimenting with live events: Regal movie theaters are used by churches in Washington, D.C., Houston, Orlando, and Buford, Ga. (This reportedly has led to some confusion by younger parishioners, who sometimes believe they are about to see a Sunday-morning screening of Madagascar.) Regal and others have also leased theaters to companies like Microsoft (Research), Sprint (Research), eBay (Research), and American Express (Research) for corporate events, complete with big-screen satellite presentations.

The full optimization of theaters will come, experts say, when the business converts from celluloid to digital. The new format will allow not only for instant and dirt-cheap distribution of films but also for targeted distribution of independent films, distinct versions for unique audiences, subtitles, and dubbing, never mind beamed-in rock concerts or kids' shows.

"Digital is a very big deal," says Dan Fellman, president of domestic distribution at Warner Bros. "It's going to take some time, but it could save our industry billions of dollars."

The only problem: The cost savings that Fellman refers to - print and shipping expenses, which would be unnecessary in a digital world in which a film is simply downloaded - fall to distributors. Yet exhibitors have to shell out for the digital projectors, which cost more than $100,000 per screen.

Wall Street financier Ronald Perelman, for one, who owns the film-equipment company Panavision, is betting the transition to digital will go slowly. In January he bought film-service company Deluxe for $750 million.

"Deluxe can transition to digital services along with the rest of the business," says Perelman. "When that happens, I don't have a clue. Right now it's not even clear what the savings would be if you really drill down."

Seven years ago FORTUNE ran a piece about the movie business going digital: "Both studios and exhibitors say they expect that digital distribution should begin in three to five years and that it will be widespread by next decade's end." In that year, 1999, there were ten digital screens in the U.S.; today there are only 192 (vs. some 38,000 analog screens).

Adoption is going somewhat better with online ticketing, which Redstone says now accounts for up to 8 percent of her theaters' seats. Such ticketing is dominated by two players: Movietickets.com (owned by a group of media companies and theater chains, including National Amusements, Marcus, and AMC) and the larger Fandango (founded by a rival group of theater owners, including Regal and Carmike, and a couple of venture capital firms).

What about a merger between Fandango and Movietickets, so moviegoers have a one-stop shop?

"My guess is that something would happen eventually," says AOL chief Jon Miller. (Movietickets is the back-end processor for AOL's Moviefone.) "[Consumers] would know where to get movie tickets," Miller goes on, "and that would help adoption in online ticketing happen faster."

Redstone says that there have been discussions between the two e-ticketers, but that "cultural" differences remain.

Consider, then, the movie experience of the future. Earlier in the week you ordered and printed your tickets online from a single Web site (accumulating points for a free vacation). Of course you picked your favorite seats, 12D and 12E. On Saturday a taxi ordered by the theater picks up you and the family at 6 P.M. sharp and whisks you to a steakhouse in the theater complex.

At 7:45 a theater sitter takes the kids to either the chaperoned game zone or a PG-rated feature, while you stroll over to your own R-rated film. You are met by an usher who seats you in a plush swivel chair and takes your afterdinner drink order. The lights dim, and the super-crisp digital print appears on the screen.

Afterward there is the nightcap at the mahtini bahr. Then you pick up the kids and head home via theater cab. If that sounds as if it's worth leaving the house for, theater owners may live to fight for another hundred years. If not ...

Reporter associates Corey Hajim, Susan M. Kaufman contributed to this story.