(FORTUNE Magazine) – If TV imitates life, look for these plot lines in prime time next season. On NBC's Seinfeld, Jerry puzzles over the value of the stock options he gets from a network TV mogul. On ABC's Home Improvement, meanwhile, Tim and his producers sue their bosses to get more money for their TV show, Tool Time.

In the real world, the networks aren't amused. To get Seinfeld and Home Improvement back for another season, NBC and ABC will have to dole out more than they've ever paid for a half-hour comedy--as much as $5 million per episode for Seinfeld; no less than $3 million for Home Improvement. That's far more than the $500,000 the networks typically paid a few years ago. Both megahits and their stars, Jerry Seinfeld and Tim Allen, became free agents this spring, and they are using their clout to drive up the cost of doing business in prime time to unprecedented levels.

Why can they push General Electric's NBC and Disney-owned ABC around? It's simple. The networks need the two comedies--first, because they're highly profitable. And second, because they anchor the strongest nights for their networks.

But some TV execs worry about the long-term repercussions of such breathtaking deals. Even the most popular shows are losing audience, and escalating costs could come back to haunt broadcasters--particularly as they extend their largess to lesser programs and stars. "The problem for the network business is that you have declining viewership, revenues that are going up moderately, and costs that are rising rapidly," says Tom Wolzien, a former NBC executive and a media analyst with Sanford C. Bernstein. "If you look at it on a macro basis, it's a very tough business down the line."

Behind the scenes, the Seinfeld and Home Improvement talks feel entirely different. The Seinfeld negotiations, which could be over by the time you read this, have been friendly--with the help of GE Chief Executive Jack Welch, who met twice with Seinfeld. The wrangling over Home Improvement, by contrast, turned rancorous last month when the show's producers sued Walt Disney Co., parent of both ABC and Disney Television, the studio that owns the show.

There have always been battles about money, but the stakes today are higher. Traditional networks not only bid against each other; they also compete for a limited pool of talent with Fox and upstarts WB (owned by Time Warner, the parent of Fortune's publisher) and Paramount's UPN. The stage was set for the current contract talks last year when CBS and ABC paid record-breaking fees to bring TV stars Bill Cosby, Ted Danson, Michael J. Fox, and Arsenio Hall back to television. The studios, which supply most of the programs, figured that if these untested shows could command license fees of around $1 million per episode, proven hits were worth far more.

Certainly Seinfeld, television's top-rated comedy, deserves a raise. With nine 30-second commercials per show selling for about $475,000 each, NBC takes in roughly $7 million per episode, including the reruns. Most of that is profit since NBC pays Time Warner's Castle Rock Entertainment, which owns the show, roughly $2.1 million an episode. What's more, Seinfeld has proved to be a fabulous way to lead viewers to shows, like Frasier, that were introduced on Thursdays and then transplanted elsewhere. Most remarkably, Seinfeld's ratings have barely slipped from their peak, even during the show's eighth season. Says Steven Sternberg, who buys ads for BJK&E Media: "I wouldn't say it's worth any cost, but it's worth a very high cost." An NBC insider agrees: "This is unique. Look how much the show has meant to us for so many years." Translation: Everyday stars need not apply.

Seinfeld is so important, in fact, that GE chief Welch has visited with its 41-year-old star in New York City and Los Angeles. Knowledgeable sources report that Welch suggested that GE stock options might be a way to sweeten NBC's already lucrative offer. While Seinfeld, as part owner of his show, is already rich, his salaried co-stars like Julia Louis-Dreyfus, Michael Richards, and Jason Alexander haven't earned as much. They initially sought $1 million apiece per episode, up from about $125,000 now.

The Home Improvement story is more complex. Wind Dancer Productions, a company formed by the show's creators and producers, went to court because it believes the company is the victim of a sweetheart deal between the Disney Studio and ABC. The deal, they allege, would artificially depress the network payment for the show. That would reduce their share and keep more money inside Disney-ABC. Wind Dancer also wants the court to allow Home Improvement to be shopped elsewhere to test its value. The producers reportedly offered to buy the show themselves for $4 million an episode--Disney pays less than $2 million--believing they could resell it for at least that much.

But insiders expect the dispute to be settled. ABC's viewership has fallen 14% this season, and in one recent week the network sank below NBC, CBS, and Fox in the crucial 18- to 49-year-old target audience group. While Home Improvement has suffered too--losing 12% of its viewers--it remains ABC's only top-ten entertainment show.

Network execs can justify the deals they'll likely give Seinfeld and Allen. But their big-spending ways are beginning to hurt. For example: ABC's Roseanne, TV's most expensive sitcom and for years very profitable, costs $2.7 million per episode and now brings in significantly less than that in ad revenues. ABC's Lois & Clark, an hour-long drama, has sunk to the bottom of the Nielsen pile despite a hefty $2-million-per-show pricetag.

How will this story end? Well, the Big Three nets have enjoyed five consecutive years of rising ad revenues, even as their share of the prime-time audience has fallen from 63% to 50%. Should the ad market soften, the networks will be stuck with a lot of unprofitable shows. Then we may see a new plot line: On the next Seinfeld, Jack Welch makes a guest appearance--to ask Jerry for a loan.

REPORTER ASSOCIATE Henry Goldblatt