(FORTUNE Magazine) – HOLLYWOOD HAS BEEN SLOW to catch on to the computer age. Sure, last year the Macintosh PowerBook became a fashion accessory for producers and stars -- even though it isn't always a useful tool for Tinseltown titans, many of whom never learned to type. But the info-tech revolution in the entertainment industry started without them, far from such favored haunts as Spago or Patina. Like a Michael Crichton fantasy of technology run amok, the so-called information highway has lots of people worried along the Hollywood-New York axis of movie studios, record labels, and book publishers. Companies that for decades have dominated the manufacturing and distribution of creative works face the prospect of an electronic alternative -- a high-speed network that runs to every home and can deliver video, music, and text cheaply and quickly. New players could muscle the traditional entertainment companies out of a big share of profits. When IBM and Blockbuster Entertainment last year announced a plan to transmit recorded music over optical fibers to retail stores and manufacture CDs on the spot, record-label executives closed ranks in opposition. When Bell Atlantic and Tele-Communications Inc. trumpeted their boffo merger to provide information and entertainment in the home, Hollywood's reaction was terror. The world had changed and nobody there had much to do with it. The issue is whether the companies that currently dominate the industry can stay in control. Potentially, creative artists won't be so reliant on the traditional gatekeepers that decide what to produce and promote. They'll have the option of cutting deals with electronic warehouses that will serve as the new middlemen -- companies operating powerful computer systems that will store the works in digital form, apply software to guide customers' selections, and handle billing. Alternatively, artists will be able to send their works via the electronic highway directly to consumers' homes. Either way, the artists could wind up receiving more of the money that people pay for their works -- rather than the modest percentage they now get. Movie theaters, Tower Records, and bookstores won't just disappear, of course. And media conglomerates like Paramount, Sony, and Time Warner (which owns FORTUNE's publisher) may be sufficiently diversified to cash in on technological change no matter how it plays out. But the advent of the information highway conjures up intriguing possibilities: -- A best-selling author with a fiercely loyal following -- say, Tom Clancy or Stephen King -- decides he deserves a lot more than the standard royalty (15% or so) paid by publishers to authors of hardcover books. Why get only $3.75 of the $25 cover price when he can publish a digital version himself? Even after spending his own money on newspaper or magazine ads to inform the faithful that the new novel is available on the electronic network, the author could reap twice as much profit on each electronic copy as he would for the paper- cloth-and-glue version. -- The next Pearl Jam gains a cult-like following in Seattle rock clubs, and record executives woo the young musicians. But instead of signing with a major label for a royalty of 8% to 12%, the band decides to produce its own albums and put them on the net so that fans can make their own digital copies. -- A gifted but impoverished young director shoots a remarkable first film with only $7,000, as in the case last year of Robert Rodriguez and El Mariachi, his playful swipe at shoot-'em-up Westerns. Rodriguez was lucky enough to be discovered by a major studio, which picked El Mariachi as one of the 450 feature films Hollywood releases each year. Future Rodriguezes might have the chance to reach a sizable audience through the network even if Hollywood turns them down. -- Director James Cameron and actor Arnold Schwarzenegger decide they don't need a studio to produce and distribute Terminator 3. Instead, they cut a deal with a company like Bell Atlantic to finance the filming. Terminator 3 could make back its investment in a single week of pay-per-view -- the new ''video on demand'' version that lets TV viewers start and stop the film whenever they choose. The filmmakers would keep for themselves tens of millions of dollars that would have gone to a studio. Nathan Myhrvold, Microsoft's senior vice president for advanced technology, predicts that a single film could gross $1 billion ''at the set-top'' in the foreseeable future. SOME OF THESE SCENARIOS are no longer wholly fantastic. Jeff Berg, head of International Creative Management, says he's gearing up to advise clients like Schwarzenegger and Cameron on how to exploit the info highway. Stephen King put his short story ''Umney's Last Case'' on the Internet in September -- a month before its publication in his book Nightmares and Dreamscapes. Prospective readers send E-mail to the Online Bookstore in Rockport, Massachusetts; Online E-mails back instructions on how to order transmission of the 52-page story (price: $5). The company advises readers to call in or fax in their credit-card numbers rather than send them by E-mail: The ( Internet, with cyberpirates lurking about, lacks the security and privacy that future fiber-optic networks will need for handling commercial transactions. AMONG the entertainment media, the $28-billion-a-year business of recorded music appears most vulnerable to a major shakeup, since consumers will be able to make digital recordings at home. No breakthroughs are required. ''From a technical perspective, electronic distribution could happen tomorrow morning,'' says Al Teller, chairman of MCA Music. In April, Yamaha will introduce a unit for PCs, Macintoshes, and workstations that can both record and play back CDs. It is designed to fit slots originally intended for CD-ROM or floppy-disk drives. Using data from a network or another CD, the unit can record 650 megabytes (the capacity of a CD) in 15 minutes; copying an album's worth of music takes less than five. The initial price is high -- over $5,000 -- in part because the laser required to ''write'' data on a CD is much more powerful than the kind used to read them. But Yamaha expects prices to fall to around $500 within three years. Other technologies may prove less expensive. Sony's Mini-Disc machines, currently $700, ingeniously circumvent the need for an expensive laser writer. The recorder inscribes music on the disk by magnetizing crystals on its surface so that they permanently reflect light; it uses a laser in playback mode to read the optical signals. Another contender is Philips's Digital Compact Cassette tape format, which works much like ordinary cassette tapes but produces CD-quality sound. Rather than comb the racks of record stores, future consumers may browse on- screen catalogues and preview tracks from huge inventories of albums. A forerunner: MusicNet from MNI Interactive in San Francisco's so-called Multimedia Gulch, a warehouse district that's a hot spot for startups. For a membership fee of $3.95 a month, customers can hear clips over the phone from any new album released in the U.S. Members either spell out the artist's name on the phone keypad or enter a five-digit code listed in a monthly newsletter. They can press 0 to connect to an operator and order CDs for delivery by mail. MusicNet's software facilitates what founder John Atcheson, 34, calls ''electronic word of mouth.'' For instance, the system might detect that Nirvana fans also like a lesser-known group that's on the rise. When a member previews a Nirvana song, the system will suggest he also try listening to the other band. Backed by two of Silicon Valley's top venture-capital firms, Kleiner Perkins Caufield & Byers and Mayfield, MNI plans to expand its service to movies and novels. Intouch Group, another Multimedia Gulch startup, has installed kiosks at 60 music stores nationwide. Using a touch-sensitive screen, shoppers search an interactive catalogue, listen to music excerpts, and decide which CDs they'll buy. Someday consumers will be able to do the same thing at home. The digitized albums will reside in an electronic warehouse, or ''server,'' connected by the network to cheap PCs in the home -- or to interactive TVs or game systems from the likes of 3DO, Sega, or Nintendo. Electronic distribution faces the formidable barrier of industry politics. Because record companies maintain huge investments in CD plants and control their own powerful distribution arms, they have a big stake in the status quo. That's why the major labels opposed the joint venture of IBM and Blockbuster, which owns some 400 music stores. ''Here's someone else who wants to be the gatekeeper,'' MCA's Al Teller told Musician magazine. ''Why would we empower somebody else to take over our distribution business? I'd prefer that our finger is on the button.'' So far no major music company has joined the IBM-Blockbuster alliance, which Teller says could end up ''an information highway with no cars on it.'' But underestimating IBM and Blockbuster might prove a big mistake. As part of Blockbuster's ambition of creating ''total entertainment stores,'' the alliance hopes to introduce retail kiosks like those of intouch, as well as in-store CD fabrication, by mid-1995. It also plans on-demand manufacturing of videogames, movies on CD, audio books, and software. What could such developments mean for retailers? Possibly record stores, bookstores, and video stores will stock copies of only the newest, top-selling titles. They'll use digital transmission for virtually all other items -- and for making fresh copies of hot titles that run out of stock. To counter IBM and Blockbuster, MCA Music is developing its own in-store on- line CD printer, which it will make available for any company's albums in an effort to set an industry standard. Teller expects to test a prototype this year and to launch an ''aggressive rollout'' in 1995. He says, ''Electronic distribution is simply a challenge we have to face. If we have to reinvent ourselves to maintain our viability, so be it.'' Hollywood, meanwhile, has come to see ''upside potential'' in the information highway. Today, home video is a $14-billion-a-year business, almost three times U.S. box-office sales, and ranks as the studios' No. 1 source of revenue. Yet because studios sell tapes outright to video chains rather than collect a per-rental royalty, they wind up with only about 25% of what consumers pay the video outlets. If video-on-demand siphons off a few billion dollars from the video stores, and if studios can capture more than 25% of what consumers will pay for it, big gains in profits would seem assured. No wonder the studios want to find a way to exert control. That's one reason Time Warner will test an advanced interactive network in Orlando, and Paramount wanted to link up with Viacom. That's also why the major studios are talking with high-tech companies like software giant Oracle about buying and operating their own digital video servers rather than relying solely on the phone or cable companies to provide electronic warehouses tied to the networks. CUT TO THE OTHER COAST -- New York, center of the $17-billion-a-year book publishing business, where editors and authors are staking competing claims to the digital future. Until recently, writers typically retained electronic rights to their books along with various other rights -- like Braille transcriptions -- that rarely resulted in much money. But Random House, Simon & Schuster, and other major houses have instructed their editors to acquire electronic rights in all future deals. The Authors Guild, a professional association for book writers, countered last fall with a position paper rallying members to retain the rights for themselves. ''Publishers say they are taking a hard line, but they do give in,'' says Paul Aiken, the Guild's attorney, who muses, ''A year ago, no one was concerned about these issues.'' The information highway will give rise not only to video and CDs on demand, but also to books on demand. Xerox foresees virtual bookstores using high- speed printers that bind while they print. Its DocuTech printers, introduced in 1990, cost as much as $260,000 and can print 68 two-sided pages a minute (a copy of Gone With the Wind would be ready in less than eight minutes). Currently they are limited to stapling or to binding with adhesive tape, but Xerox is exploring ways to produce glued-together ''perfect'' bindings like those of paperback and hardcover books. Bookstores could use the new machines to offer on-line on-demand book printing, as could copy shops such as Kinko's, a major buyer of high-speed printers. This technology is already starting to change the $2.6-billion-a-year market for college textbooks. Primis, a unit of McGraw-Hill developed in conjunction with Eastman Kodak and R.R. Donnelley, prints books on demand from on-line feeds. Professors can design their own texts, mixing and matching sections from some 100,000 pages of published works. Primis says some 800 universities use the service, although only a half dozen, including Harvard, have special Kodak printers that can handle the digital transmissions; the other campuses receive deliveries from local Donnelley printers within 72 hours. In an industry whose basic technology was invented 500 years ago, that's a nanosecond.