(FORTUNE Magazine) – Among the great schisms of modern times--freedom vs. tyranny, Nike vs. Reebok--ranks the argument in Hollywood over whether content or distribution is the more valuable. "Content is king!" cried Sumner Redstone of Viacom, and Disney's Eisner warmly agreed. On the other side of the great divide, Rupert Murdoch of News Corp. favored distribution. The debate becomes moot with Disney's epic deal, a $19 billion acknowledgement that neither side is right: To succeed, an entertainment company needs strength in both.

Some media critics have attacked Disney's deal on the grounds that conglomeration is outdated. But the conglomeration of Disney or Time Warner is not like that of ITT, which combines property insurance with antilock brakes and casinos. Disney's merger with Cap Cities unites entertainment production and distribution operations that complement each other like oil and vinegar. By contrast, the Westinghouse-CBS combination merely piles two broadcasters on top of each other. The closest that transaction comes to excitement is from tax-loss carry-forwards.

Hollywood studios and TV networks are natural partners. The Federal Communications Commission cleaved the two businesses apart in the 1970s with arcane regulations known as the financial interest/syndication rules. Fin/syn is scheduled to lapse this fall, making deals like Disney's permissible again.

So long as fin/syn governed their behavior, entertainment companies had to choose between content and distribution, giving the debate enormous economic and strategic consequence. Content hawks like Eisner argued that people pay for entertainment, not distribution; no one wants to see a lousy movie or program, regardless of where it's shown. The counterargument was equally convincing: Even the best programming will die unless it can reach its audiences.

In theory, the much-discussed convergence of computing, telecommunications, information, and entertainment creates a hierarchy of value, in which content, the scarcest commodity, bobs to the top. But reality is more complicated than that. "The fundamentals of the content business are high overhead, high risk, and low margins," says Jonathan Dolgen, who runs Viacom's Paramount studio. Movies cost an average of $51 million each to make and market, and Hollywood churns out a couple hundred of them each year. Yet 20 top pictures typically consume roughly 40% of total box office, leaving only crumbs for the rest. The odds are no better in TV production.

The box office isn't where the real money gets made, explains film producer John Davis (The Firm, Waterworld). "Filmed entertainment is a terrible business for the studios based on current returns," he says. "It's an asset play, not a cash flow play." After building up great libraries of copyrighted movies and shows, production companies usually make up for lean years by selling out to a new owner for a fabulous price: Every major studio but Disney has done that more than once. But the leading content companies are getting almost too big to buy, making expansion into distribution a more attractive alternative.

ABC, NBC, Fox, and CBS still reach mass audiences with an efficiency unmatched by cable TV, movie theaters, videocassettes, or anything else. That's true despite the growing popularity of entertainment alternatives, which have stolen 40% of the prime-time audience from networks. The scarcity of mass-distribution systems is what has magnified the economic value of networks and transformed them into strategic prizes for studios.

Both Disney and Cap Cities are in the business of introducing new brands to audiences and then exploiting those brands for all they're worth. With ABC in its grasp, Disney can wring more value from its own TV productions by giving them favorable scheduling and promotion. Similarly, stores in Disney theme parks can sell sports merchandise with the logo of ESPN, Cap Cities' sports channel. The opportunities are endless.

Only one other entertainment company commands as powerful a combination of content and distribution--Rupert Murdoch's News Corp. The rest of Disney's competitors are more disadvantaged. The list reads like a Hollywood who's who: CBS and Westinghouse, NBC owner General Electric, and studio owners Time Warner (Warner Bros.), Viacom (Paramount), Seagram (MCA), Sony (Columbia and TriStar), and Turner (Castle Rock, New Line).

In a decade or two or three, when telephone, cable, and satellite companies may offer 500 channels of mass distribution to every home, the networks' present advantage will shift to marketers with brand names viewers trust. But a lot of money will be made and lost between now and then--and when that day comes, Disney's shareholders will not be sorry to possess such familiar trademarks as ABC and ESPN.