(FORTUNE Magazine) – I'm not much of a television fan (some evenings I do watch the news), but I'm delighted that TV is going digital. Not because of the larger screens it will bring, but because of the bigger picture: the opportunities that digital television presents for new companies.

The world of video has been moving from analog to digital for years--first through direct satellite broadcasting and more recently through digital videodisks and videocameras. The advent last month of digital television broadcasting, which the networks are beginning to embrace, is the beginning of a decade-long transformation in which all of American television will be digitized. This multibillion-dollar technology upgrade is an even greater economic opportunity than the transition in the 1960s from black-and-white to color TV.

For broadcasters, the digital era will require new cameras, studio equipment, servers, networking technology, and transmission systems to produce, manage, and disseminate the higher-quality moving images. That's a future windfall for today's large makers of TV gear, such as Ikegami, Panasonic, and Sony. Small innovators also should benefit. For example, Faroudja Laboratories should be able to sell more of its image enhancers, which adapt libraries of analog programming for the digital world. Sales also should increase for Avid Technology, Pinnacle Systems, and Vibrint Technologies of Bedford, Mass., which make digital editing and production systems. There's more to come: Venture capitalists have invested more than $100 million in startups involved in this digital video transition.

Most of the new equipment companies in this field are supplying parts to larger firms already in the business, because invention is less expensive than building a brand or a distribution channel. Such a strategy holds promise in the area of professional videocameras. There's a ready market for integrated circuits known as CMOS sensors. These would replace the chips that today convert light into electricity for videocameras. CMOS circuits, which offer high resolution at low power, would make possible cheap, light cameras with long battery lives. Among the young hopefuls working in this area are G-Link Technology of Santa Clara, Calif., Photobit of Pasadena, and VLSI Vision in Scotland.

In addition to new cameras, broadcasters will need better connections between studios and transmission towers--the present links, primarily microwave radios, have limited capacity. That's an opportunity for Artel Video Systems of Marlborough, Mass. Artel's communications gear carries both analog and digital signals, enabling broadcasters to upgrade gradually.

Computer technology may also help resolve a growing problem for the TV industry--finding specific images hidden in vast archives of programming. New digital tools from Virage of San Mateo, Calif., and Islip Media of Orlando can create searchable guides to video recordings by detecting and classifying changes in scenes, extracting closed-caption text, and sometimes even recognizing speech.

In an interesting case of technology fighting technology, broadcasters may find assistance from Silicon Valley in their fight against the encroachment of the Internet, which is taking away viewers and threatening advertising revenue. When the Federal Communications Commission handed over additional chunks of bandwidth to television networks for digital broadcasts, it also gave them permission to use some of that spectrum for transmitting data as well as entertainment. This additional spectrum capacity is so great that the entire contents of major Websites could be sent over the air, turning broadcasters into Internet programming providers. SkyStream of Mountain View., Calif., is just one of many companies looking to deliver traditional video blended with Internet data.

On the consumer side, digitization will gradually require that every TV set, VCR, and camcorder be replaced, or at least adapted with new set-top boxes. Here, too, startups are happy to employ the parts supplier strategy. Equator Technologies of Campbell, Calif., wants to create chips that would enable standard digital television sets to receive signals in any of the 18 different broadcast formats approved for use in the U.S.

Young companies also are looking beyond the TV set. For example, VM Labs of Los Altos, Calif., is designing integrated circuits that will add interactivity to DVD players, direct broadcast television receivers, or set-top boxes. TeraLogic of Mountain View is making chips that promise to bring digital television to personal computers for a few hundred dollars.

Once home computers begin to serve as receivers for digital television, they will beam images to any television set in the house. What digital joy! One family member will be computing, while others will be watching movies delivered by that very PC to TV sets in other rooms. That's the idea behind Ambi, a wireless multimedia networking system Philips will launch early next year based on circuitry from Sharewave of El Dorado Hills, Calif. Ambi's signal-compression technology can squeeze 120 megahertz of full-motion video into a mere four megahertz of radio bandwidth.

Several emerging companies like Replay Networks of Palo Alto and TiVo of Sunnyvale, Calif., expect to play roles in the digital replacement of the VCR with $1,000 devices that find and record live TV programs. And digital VCRs with the quality of digital videodisks are likely to be a feature on personal computers introduced for Christmas of 1999, thanks to an integrated circuit recently devised by C-Cube Microsystems.

Then--and only then--might I consider using my television set as more than a pedestal for bowling trophies.

RICHARD A. SHAFFER is founder of Technologic Partners, an information company focused on emerging technology. Except as noted, Shaffer has no financial interest in the companies mentioned. For an expanded version of Watch This Space, visit www.tpsite.com/tp/fortune/. If you have comments, please send them to shaffer@technologicp.com.