(FORTUNE Magazine) – Ted Turner drank iced tea. Bill Gates downed prodigious amounts of Cherry Coke. They shared a lunch of cold salmon, sizing each other up across the dining-room table of a dream house built by Microsoft in Redmond, Washington, to showcase the computer and television technology of tomorrow. The setting was apt: Turner and Gates were looking for a way to shape the future together.

Each had something the other wanted: Gates had cash, Turner a global news organization in CNN. Soon after their meeting--this was May 1995--they agreed on the outline of a deal. Microsoft would put up $1 billion for a stake in Turner Broadcasting, access to CNN's content, and half of all future revenues generated from "interactive news." Turner would use the money to pursue his dream of owning a broadcast network by going after CBS.

The courtship didn't last long. Gates hardly knew what to make of Turner, who'd built his business on old movies, knew almost nothing about computers, and rambled throughout the lunch. "It was a typical Ted Turner free-ranging, free-association, stream-of-consciousness, vision-of-the-world conversation," said a Microsoft executive who was there. Turner and his people, cognizant of Gates's reputation as a shrewd negotiator, feared that they might be selling too much of their future for $1 billion. By summer's end, Turner had abruptly reversed direction. Dropping his plans to pursue CBS, he unexpectedly agreed to sell Turner Broadcasting System to Time Warner (owner of FORTUNE's publisher).

Thus spurned, Gates and Microsoft soon found another partner. NBC, the nation's most popular and profitable network, was once interested in acquiring Turner in this unending minuet of media alliances. With its corporate parent, General Electric, which has its own reputation for financial savvy and market power, NBC eagerly embraced Microsoft--and its millions. That sets the stage for a showdown of media titans: Gates and GE's Jack Welch vs. Turner and Time Warner's Gerald Levin, with the prize being nothing less than global power in television and online news in the 21st century.

On July 15, Microsoft and NBC are to begin their multimedia assault by simultaneously launching a 24-hour cable news channel called MSNBC and an online news service, MSNBC Interactive. They are taking dead aim at Turner's CNN. "Of course I'm worried," Turner told FORTUNE before a recent Atlanta Braves game. "I worry about everything."

He should worry. CNN has become a formidable franchise that until now has had no real competition. That's exactly what awakened the CNN envy currently gripping the networks. The timing isn't ideal for Turner, who must defend himself with his company in limbo as the government reviews the $7.5 billion Time Warner deal.

What's more, it's not just Microsoft and NBC who want their own cable news network. Rupert Murdoch's Fox network intends to launch one later this year. So did ABC News, the broadcast news leader, until top executives at the Disney-owned network decided in May that the cable news game is just too expensive to play, particularly for a company whose heart is in entertainment and sports.

Just how expensive, no one knows yet, but "it's not for the faint of heart," says NBC President Bob Wright. NBC and Microsoft have pledged to invest $250 million each in MSNBC over the next five years. Meanwhile, Murdoch has committed $300 million just to buy channel space. A business plan floated at ABC had forecast losses of up to $800 million, says a source. ABC and CBS will seek other, less costly avenues into cable, although with Westinghouse considering splitting its broadcasting and industrial businesses, CBS may be in play again.

Why are media giants so eager to spend so much to jump into CNN's game? Largely because the cost of staying on the sidelines could prove even steeper for any network that wants to remain a force in television news. Viewers are abandoning the evening newscasts: Collectively, their ratings have tumbled nearly 30% in the past decade. Yet news gathering remains expensive; simple economics tells you that the only way the networks can flourish is to spread their costs over more programs and delivery systems. Says NBC News President Andrew Lack: "We need to be in cable if we want to grow. If we weren't doing this, we'd lose long term."

Until ABC dropped its cable plans, President Robert Iger and Jeff Gralnick, the executive in charge of ABC's channel, made the same argument. Said Gralnick: "If you don't agree to suffer the pain of doing this, you're agreeing to be marginalized ten years from now." For ABC, this is bitter history repeating itself. ABC and Westinghouse launched Satellite News Channel in 1982 to compete with CNN, lost at least $60 million, and sold it to Turner 16 months later to stop the flow of red ink.

With ABC benched and Fox just getting started, NBC and Microsoft are well positioned to take advantage of their head start. MSNBC Cable will immediately reach about 22 million homes, 20.5 million of which come because the channel is replacing an existing NBC-owned cable network, America's Talking. MSNBC Interactive is a longer-term play that will exploit Microsoft's technology. The NBC broadcast network's news operation and unrivaled promotional clout will drive consumers to both new ventures. "MSNBC is a smart hedge," says Larry Gerbrandt, senior analyst with Paul Kagan Associates, a Carmel, California, media consulting firm. "NBC realizes that viewers are turning off their TV sets and turning on their computers. MSNBC is a strategy to reach them no matter which medium they're using."

Certainly that's the aim of the man who set off this scramble, a man who, ironically, watches almost no TV. Bill Gates had to ask aides for tapes of David Letterman's late-night show to prepare for a guest spot, and he rarely has time for TV news. But he and Microsoft executives decided early last year to get into the news business as part of a drive to capitalize on the Internet. "News has broad interest and takes advantage of the fundamental nature of the new medium," says Nathan Myhrvold, Microsoft's group vice president for applications and content.

Early on, Microsoft arranged to buy content for its online service, Microsoft Network, from NBC News. But Gates and his people wanted to own and control news, not just distribute it. "That was NBC's brand, their resources, their editorial judgment, and most of the return would have gone back to them," explains Peter Neupert, Microsoft's vice president for strategic partnerships.

Although Microsoft and NBC have different agendas--Microsoft's primary interest is the Internet and NBC's is cable--the alliance took shape quickly. The cable picture came into focus during a meeting at NBC's Rockefeller Center headquarters last October, on the day of the Million Man March. NBC News had its biggest star, anchor Tom Brokaw, make the pitch to Gates over a speakerphone from Washington, where he explained that NBC had correspondents and crews gathering vast amounts of material that wouldn't make the evening news but could be produced for cable or cyberspace. Brokaw, who is acquainted with Gates and with the Internet--he spends time reading the news online during vacations at his Montana ranch--said later: "If you're not moving forward, you're going to die in this business these days."

NBC and Microsoft share 50-50 ownership of the cable and online ventures, to ensure that they have equal stakes in the future of both platforms. To the cable venture, NBC brought a valuable asset: the distribution deals in place for America's Talking, a low-rent, low-rated network that Wright was willing to close. Just how valuable are those deals, which let MSNBC leapfrog dozens of new channels vying for channel space? Microsoft agreed to pay NBC $220 million for half-interest in America's Talking, a sum that covers all but $30 million of NBC's $250 million investment in MSNBC. On top of those millions, Microsoft will pay NBC license fees for footage provided to MSNBC, sources say. Hmmm. Maybe the price of getting into cable news isn't that steep after all--if you can make Bill Gates your partner.

Between shifting all the America's Talking distribution contracts to MSNBC and new deals with cable operators, the channel will be carried into 40 million homes by the end of 1999. Some cable operators are protesting that they aren't required to carry MSNBC, but others are endorsing the venture. NBC has just signed agreements with Cox Communications and Adelphia Cable Communications, which will deliver MSNBC to all their subscribers, even those who do not now get America's Talking.

But MSNBC has a long way to go to catch CNN, which reaches 68 million U.S. homes and another 107 million worldwide, and makes gobs of money. In fact, it's hard to say which of Turner's properties put up better numbers last year: his collection of news channels or his World Series-winning Braves. Here's the scorecard for CNN's news channels: advertising revenues, $383 million; subscription fees from cable operators, $300 million; operating profits, $265 million; operating margins, better than 35%. Fast-growing CNN International, which beams English-language news to nearly every corner of the globe, accounts for almost 20% of revenues. No broadcast news division earns nearly as much as Turner's news group, which, besides CNN and CNN International, includes CNN Headline News, CNN Radio, CNNfn, an airport news feed, and CNN Interactive, a popular Website. Next up: CNNSI, a sports news network and joint venture with Time Warner's Sports Illustrated, which is scheduled to launch in December.

CNN also boasts a bigger news-gathering army than its broadcast rivals. "We have as many bureaus outside the U.S. as ABC, CBS, and NBC combined," says Eason Jordan, who runs the far-flung international operation, including 21 overseas outposts. Broadcast news anchors, who have to cram the world into 90-second packages and 22-minute newscasts, covet CNN's around-the-clock airtime.

But CNN envy stops right there. Much as they admire Turner's vision and commitment, network news executives don't think much of CNN's programming or personalities--to the contrary, they're convinced they can do a lot better. NBC executives politely decline to criticize CNN on the record, but ABC's Jeff Gralnick says: "CNN is perceived as preeminent. They've been preeminent in a field of one. They can be taken."

The argument goes like this: CNN's value is obvious during a crisis, when it provides live coverage of breaking news. But CNN's day-to-day reporting is not nearly as engaging, imaginative, meaty, or enterprising as it should be. Indeed, in 16 years, CNN has arguably created just one distinctive program, the noisy Crossfire, and one star, Larry King (two, if you count foreign correspondent Christiane Amanpour, who may be headed to one of the networks). Compare that to the output of ABC News President Roone Arledge, who during those years, with far fewer hours to program, put Nightline, This Week With David Brinkley, and PrimeTime Live on the air.

CNN President Tom Johnson counters by citing independent studies showing that viewers think CNN does the best job of covering news. Besides, some raggedness is inevitable when you're working around the clock. "Keep in mind that NBC has all day to prepare for 22 minutes with Brokaw, and overnight to prepare for the Today show," he says. Still, Johnson continues, "I'll need to invest more in production and perhaps personalities." Already CNN has hired veteran consultant Frank Magid to do extensive audience preference research.

Lacking standout shows, CNN works like a utility, providing viewers a reliable flow of news without much flavor. CNN's ratings tell the story: They peak during big events, then return to modest levels. Some four million homes watched the beginnings of the O.J. Simpson trial, but CNN couldn't keep them--by the first quarter of this year, CNN's prime-time audience fell to a mere 586,000 homes. By comparison, Brokaw's Nightly News on NBC was seen in 8.7 million homes.

Cumulatively, CNN reaches nearly as many viewers but, when given a choice, audiences flock to the networks. Says NBC's Lack: "As soon as Tom Brokaw, Peter Jennings, and Dan Rather start broadcasting, everyone stops watching CNN. The numbers are pretty straightforward. We have ten times the audience." It seems self-evident that the networks win over viewers with their stars, storytelling, production values, and promotion--all the things, in short, that a network does to process the raw stuff of news into entertainment.

MSNBC will borrow that weaponry for its attack on CNN. Celebrity anchors Brokaw, Katie Couric, Bryant Gumbel, Bob Costas, and Bill Moyers will take turns presiding over Internight, a talk show that will be the cornerstone of MSNBC's prime-time lineup. Jane Pauley will host Time and Again, a nostalgia program, and Brian Williams, currently NBC's man at the White House, will anchor an hour-long newscast. The Site, a program about technology and new media, is one way MSNBC hopes to reach viewers under 50, who don't watch much news. ("CNN is a network for older people and their parents," jokes a Turner insider.)

But stars bring glitches as well as glitter. NBC plans to have its anchors relentlessly promote MSNBC's cable and online programming on the Nightly News and Today. The network's broadcast affiliates, however, don't want to see NBC newscasters touting another channel. "That's a huge problem, because you're inviting people to turn off our air," says Alan Frank, who runs the NBC affiliate in Detroit. Most stations don't like to accept even paid ads promoting cable shows.

Stars are also notoriously cranky. Top talents like Brokaw may not perform long before cable's sparse crowds. One NBC anchor was assured that the cable talk-show assignment is temporary, although NBC isn't making that plain to cable operators. Even Brokaw says he's only committed through November, though Lack says he'll stay the course: "If MSNBC and the future of NBC News are wrapped up together, you can be sure of one thing--Tom Brokaw will be there." But a rival executive scoffs: "Within two months, all of a sudden, they're going to morph Katie Couric into Helen Grubb from Durango, Colorado, and carry on."

That blunt-spoken rival is Roger Ailes, who ran CNBC and America's Talking for NBC before quitting in January to build Fox's cable news channel. Murdoch and Ailes are the wild cards in the cable deck. They've got just the beginnings of a news operation and no assured distribution, but those who have underestimated Murdoch in the past now regret it. (Try to find The NFL on CBS.) Murdoch has grabbed the attention of cable operators with a bold offer to pay $10 for each subscriber they deliver to Fox, up to a total of $300 million. He's also negotiating a deal to give John Malone and Tele-Communications Inc., the nation's largest cable operator, a 20% stake in the news channel, which Malone would then deliver to ten million TCI homes.

Murdoch's $10-a-household offer isn't all it seems. To get the cash, the operators must agree to pay Murdoch 25 cents a month per subscriber for years. "It's a very expensive loan," says NBC's Wright, sounding like the finance man he once was. But Ailes says cash-strapped cable operators are receptive: "Would the operators rather have the $10 or not have it? It's a spectacular deal, and that's why ABC folded their cards."

How Fox will program its network remains unknown. Ailes, a longtime Republican operative who produced Rush Limbaugh's TV show, claims: "We're going to go back to basic balanced journalism. It will be so balanced that other so-called journalists will attack us." Yes, they will. NBC's Lack says: "The legacy of news under Rupert Murdoch is A Current Affair. And that's a disgrace." Ted Turner, meanwhile, has promised to squish Murdoch "like a bug." Maybe they could all get together for a mogul mud-wrestling show.

Cable giants TCI and Time Warner could greatly affect the fate of both the Fox and the MSNBC channels. Together, TCI and Time Warner control access to nearly 40% of cabled homes; they also happen to be Turner Broadcasting's biggest stockholders after Turner. TCI has agreed to carry MSNBC into five million of its 13 million homes by the end of the century. Time Warner, with another 11.7 million, hasn't disclosed its plans. NBC executives expect carriage, if only because Time Warner doesn't want to give the Federal Trade Commission a reason to oppose the merger. Whether these powerful cable operators will embrace or bury the new channels is anybody's guess.

Back in Redmond, Bill Gates and his people are keeping their focus on MSNBC Interactive. They're working--hard--toward the day when NBC's video can be stored online and easily retrieved by viewers. Think of it as news you can choose, and consider what it will do to the linear world of TV news. To Microsoft, the present is mere prelude. Says Myhrvold: "You can envision a scenario where online becomes more important than a cable channel in ten, maybe 20 years."

Of course, Time Warner and CNN are thinking along these lines too. Both are providers of online news, and both are experimenting with interactive television. But they are up against Bill Gates and Jack Welch, the world's dominant software company and the network of must-see TV. This should be quite a show.

REPORTER ASSOCIATE Ed Brown