(FORTUNE Magazine) – Meet Daniel A. FitzSimons, would-be cable programmer. FitzSimons is the founder and chairman of the Puppy Channel, a startup network that promises wall-to-wall puppies, relaxing instrumental music, no talk, and "very few people." In the coming 150-channel universe, he asks, why not? "There's something about puppies that makes people feel better," explains FitzSimons, a 57-year-old former advertising executive from Cleveland who leased a tiny booth at a recent cable industry trade show. "It's for people who want to relax at the end of a hard day. People who want to spend quality time with their children. People who go to work and have a dog at home that they don't want to leave alone."

Whatever you think about this business proposition, FitzSimons and his puppies are entering a crowded arena. He'll have to contend not only with direct competitors like the cable network Animal Planet and My Pet Television, which is seen in veterinary offices, but also with dozens of fledgling news, sports, music, movie, and children's channels. Coming soon to your neighborhood are spinoffs of ESPN, CNN, MTV, VH-1, Nickelodeon, Discovery, Lifetime, and E! Entertainment. Narrowcasting is about to get a whole lot narrower.

New channels are proliferating not because consumers or advertisers want them, and certainly not because anyone knows how to make money from niches that are getting thinner and thinner. The reason is technology--and fear. The cable industry has finally figured out how to squeeze more channels into its wires, using digital compression and advanced set-top boxes; by year-end, a couple of million cable subscribers in places like Hartford and Orange County, Calif., will be clicking through 150-channel lineups. Local cable operators need new channels to persuade subscribers to sign up for the digital offerings, which add $10 or $12 to the typical cable bill. So programmers, who are worried about losing market share to rivals, are lining up to fill the added slots. "It's a shelf-space game," explains Herb Scannell, the president of Nickelodeon, the leading cable network for children. "If you don't do it, somebody else will."

That's for sure. In the kids' space alone, the startups include an educational network called Noggin from Nickelodeon and the Children's Television Workshop; a Nickelodeon spinoff called Nick Games and Sports; a kids' version of the Discovery Channel; and Disney's Toon Disney, an all-animation channel. They'll compete for eyeballs and ad revenues with kids' shows on the broadcast networks as well as on Nickelodeon, the Cartoon Channel, and Rupert Murdoch's Fox Family Channel. So much new inventory has been created in the $1 billion kids' TV market that advertising rates are flat or falling.

Even in a healthy ad market, the economics facing the cable startups is daunting. They'll need years to reach even ten or 15 million homes--the big cable networks reach close to 70 million--and longer to generate substantial advertising revenues. Even now, when the average cable customer has access to 78 channels, two-thirds of the viewing goes to the six broadcast networks and top ten cable channels. Everyone else competes for leftovers and gets ad rates to match--$600 a spot for the top-rated show on MSNBC and just $100 for Court TV, according to an Advertising Age survey. Nor can the startups expect to collect big fees from local cable operators; on the contrary, they may be asked to pay for carriage.

It's no wonder that the cable dial is already spattered with red ink. Few companies break out results for individual networks, but analysts say that Disney's ESPNews and ESPN Classic, Time Warner's CNN/SI and CNN/fn, CBS's Eye on People, Viacom's TV Land, and the Speedvision and Outdoor Life channels, owned by cable operators and Fox, are all in the "investment" phase. Topping the list is the Fox News Channel, which is said to be losing $80 million a year.

To endure, a startup network needs a corporate parent with deep pockets. "Most of the services being launched by Disney, Viacom, Time Warner, and News Corp. will probably survive," says Dob Bennett, president of Liberty Media, the programming arm of Tele-Communications Inc. The media giants have built infrastructures of sales and support staff and strong, branded networks that they can use as leverage with cable operators and media buyers. ESPN, for example, might cut its high carriage fee for operators that distribute its spinoff channels.

The other key for the startups is keeping costs to a minimum--i.e., no expensive talent, news programming, or original shows. Channels with staying power will be low-cost operations like the Spanish version of MTV and VH-1-Smooth, which get music videos free from record companies, or Discovery's Science, Home & Leisure, Civilization, Health, and Wings channels, which will recycle old shows. Such channels can run on as little as $5 million a year--about what CBS pays Bryant Gumbel.

That, alas, spells trouble for startups like ZDTV, the computer and Internet channel just launched by Ziff-Davis. To its credit, ZDTV is driven by a fresh idea. "How many old movie channels does an operator want?" asks CEO Larry Wangberg. "How many news channels?" But its costs will outpace revenues for years, and ZDTV is struggling to get distribution. Ziff-Davis will need cable-industry partners to stay afloat.

The same goes for Dan FitzSimons and his puppies, who are eager to mate. "We're looking for a big dog to adopt us," he says. Then he too will ponder spinoffs. "The Shark Channel would work," he muses. "If you could watch them feed."

--Marc Gunther