(FORTUNE Magazine) – These are eventful times for television news, and we're not talking about impeachment or air attacks on Iraq. Take CBS News, the place where broadcast news was invented--and where its future is now most at risk. To boost its meager profits, CBS is laboring both to cut costs, by closing bureaus and laying off staff, and to create new revenues, notably with this month's launch of 60 Minutes II, a spinoff of the powerhouse 60 Minutes. Dan Rather, at age 67, is working three jobs: as anchor of the CBS Evening News, as host of the prime-time magazine 48 Hours, and now as a correspondent for 60 Minutes II. "It's entirely possible that one of the Big Three television organizations will cease to exist in five or seven years," Rather explains. "If there's only going to be one standing, I want it to be this one. To do that, we have to grow the business." He's not overstating the case--60 Minutes II isn't just another show; it's a strategy for saving CBS News.

And that's the way it is these days in network news, which faces the most daunting challenges in its 50-year history. Only General Electric's NBC News is thriving, thanks to its cable operations and popular programs. The Walt Disney Co.'s once-dominant ABC News is struggling, and CBS Inc.'s CBS News is trailing by most measures. Built for another era, when they functioned as the stodgy public-service arms of fabulously profitable networks, all the news divisions are trying to reinvent themselves--at once shrinking and growing, doing less actual gathering of the news and more packaging of programs for prime time, where viewers can be found and real money made. Put another way, network news operations that once modeled themselves after the New York Times, with big staffs, far-flung bureaus, and a weighty Washington presence, are looking more like People, Vanity Fair, or The New Republic, glossy magazines that sell emotion, entertainment, or spin.

The fact is, the networks don't have much choice--there's just too much news out there. Anyone looking for the latest headlines can surf through all-news cable networks CNN, MSNBC, and Fox News, CNBC's business news, ESPN's sports news, the Weather Channel, local TV stations broadcasting up to six hours of news a day, all-news radio, public radio, hundreds of Internet sites, even pagers with headlines. Why would you wait for the network news? Sure, ABC, CBS, and NBC do a better job than their rivals, and their ratings eclipse those of cable. But with their $8-million-a-year anchors, fancy sets, and worldwide newsgathering infrastructures, they're also the high-cost suppliers of news--a risky place to be in such a competitive arena. Yet the picture isn't all gloomy for network news. Ironically, the news business has become more attractive in the past few years because the rest of the network business is so bad. Hit sitcoms and dramas are harder to find, Hollywood's costs keep rising, and TV sports, with its bloated rights fees, has become a money loser. That creates opportunities for news of a certain kind: the prime-time magazines like CBS's 60 Minutes, ABC's 20/20, and Dateline NBC, which, when they stick, are among the best businesses the networks have going. That's why you can now watch Dateline five nights a week and 20/20 four nights, and why you're about to see 60 Minutes II.

Again, the news divisions don't have much choice--they've got to create more programming to stay profitable. As it is, without their magazines, ABC and CBS News probably would be losing money; only NBC is making real profits from its hard-news programs. Still, the fact that all three news divisions are profitable is no small accomplishment at a time when networks are losing fortunes in entertainment and sports. It's also a complete turnabout from the era of Paley and Sarnoff, when the networks made their money from entertainment and offered news as a loss leader, valued for its prestige and ability to satisfy the public-service requirements of the FCC. Until General Electric took over in 1986, NBC News was expected to lose money, and it did--up to $100 million a year.

"That was unique, in my experience," recalls Bob Wright, NBC's CEO. "I had been in businesses where we didn't make any money, but that was never the goal." Now Wright and NBC News President Andrew Lack focus on the bottom line, and their news operations are flourishing: FORTUNE has learned that NBC News earned well over $200 million last year, way ahead of ABC News, which earned $55 million to $60 million, and CBS News, which earned just $15 million. None of the networks release exact figures, but all have come to expect their news operations to be profitable and to grow.

That growth simply can't come from the evening newscasts, which will never regain the aura they had during the Huntley-Brinkley or Cronkite eras. Today, ABC's World News Tonight, NBC's Nightly News, and CBS's Evening News struggle to stay relevant, fighting not just cable and local news, but broader social forces like longer commutes, two-career families, and the end of the Cold War. "The idea that the breadwinner comes home to sit down, have dinner, and watch the evening news has become almost laughable," says Saul Berman, a Price waterhouse Coopers partner who advises media companies. While the programs have all adapted, moving away from the headlines and toward enterprise reporting and news-you-can-use, viewers are tuning out. The combined audience share for the three evening newscasts has fallen steadily for years, from a peak of 75% in 1980 to 47% in 1998. In the past year, among their target audience of 25- to 54-year-olds, NBC is down 8%, ABC is down 3%, and CBS is flat, a victory of sorts.

Fortunately for the networks, advertising revenues haven't fallen as far or as fast. Commercial prices have held more or less steady as new sponsors, led by pharmaceuticals companies, target the older viewers who still watch lots of news. (Well over half the viewers of the evening newscasts are 55 and older.) Among the regular sponsors of World News Tonight are Fixodent (for dentures), Aspercreme (for arthritis), Just for Men (to color gray hair), Sea-Bond (another denture adhesive), and Maalox (for worried network executives?). "The networks should be happy that there are products like Depends," quips media buyer Aaron Cohen of Horizon Media. Even so, the networks can't live off the geriatric market alone. To drive up revenues, they are all cramming more commercials into their newscasts. Typical is ABC, which sells seven minutes of network spots, up from six in 1993; that leaves just 20 minutes and 45 seconds for news.

The networks are also attacking costs once again. Since the 1980s, they've shut foreign and domestic bureaus and scaled back their Washington coverage; as an example, each network once had a full-time correspondent with legal training covering the Supreme Court, while now none do. CBS made headlines last fall when it laid off 120 newspeople, nearly 8% of its staff, but ABC and NBC also let people go, just more quietly. "If I told you that there was a date certain when we were going to stop cutting costs, you shouldn't believe me," says David Westin, the president of ABC News. The trouble is, covering news is inherently inefficient; bureaus operate a lot like firehouses, which must be staffed for emergencies but are idle much of the time. Then, when big stories break, expenses only climb. Says Andrew Heyward, the president of CBS News: "When there's a threat of war in Iraq, you're going to put somebody on the cruiser or on the battleship without knowing how many pieces he or she is going to generate." By contrast, the prime-time magazine shows are designed to commission only the stories they need; nearly all of what they do gets onto the screen.

Like the Big Three automakers, the networks are also doing more outsourcing. They buy footage from local TV stations, from foreign broadcasters and video wire services like AP Television, and from suppliers like NewsTV, a company that provides coverage to the networks from its headquarters in Manhattan--that's Kansas, not New York. "We're building an empire on being the Kelly girls of network news," says Russ Ptacek, 35, a former TV reporter who is president of NewsTV. Programs like 20/20 and Today employ his 26-person operation, he says, because "the only time the networks are paying for our services is when we're on location, working for them." More sweeping changes are inevitable--last fall, all three networks talked to CNN about sharing people and bureaus outside the U.S. "Internationally, you will probably see some consolidation of resources," says Pat Fili-Krushel, the new president of ABC, who oversees ABC News.

In theory, the networks don't need as many bureaus and reporters anymore because their role has changed. Rather than try to be first on the air with a headline or a picture, ABC, CBS, and NBC now aim to provide a unique service--the depth, analysis, and original reporting that 24-hour cable outlets and local TV can't duplicate. They'll spend less on generic news, more in places where they can add value. Westin, for example, wants to turn ABC News, which for many years threw money at people, into a lean operation where star anchors and correspondents can still command top dollar but the merely competent will earn less or be let go. "You have to be ruthless," he says. This makes sense, but the risk is that the networks will cut too close to the bone. Operating with fewer people in the field, for example, worries Paul Friedman, executive producer of World News Tonight. "Journalism is about going out and looking at things, and you can't do that by buying video from APTV," he says. And since none of the networks station a full-time correspondent in southeast Asia, say, or sub-saharan Africa, who will offer depth and analysis when news breaks there?

Of the Big Three, NBC News is best positioned for the future. Its profits are robust--about $125 million last year from hard-news programs, perhaps $100 million more from Dateline--and they are growing. "This news organization has become an attractive business, long term," says Andy Lack. "We see huge opportunities to grow on the broadcast platform, to grow in cable, to grow in global markets, and of course on the Internet." Tom Brokaw's Nightly News, the softest of the three evening newscasts, wins the ratings race, albeit by a whisker, while Today crushes its rivals (see box). More important, NBC's Wright devised a business model that makes sense for news--by embracing cable, he's able to share resources and amortize costs across NBC News, CNBC, and MSNBC, NBC's cable-and-Internet joint venture with Microsoft. One result is that expensive talent--say, Brian Williams, Brokaw's heir apparent, or Jane Pauley--can work not just for NBC News but for MSNBC as well. Repeats of Dateline stories are aired on both cable networks. And when NBC News sends out a crew, its footage can be used by the Nightly News, CNBC, MSNBC, MSNBC's Internet site, and NBC news channels in Europe and Asia. By producing more than 6,000 hours of news across its broadcast and cable platforms, NBC has driven down its average cost per hour of news from about $250,000 to $50,000 over the past five years. Its cable networks also get subscriber fees, making the entire enterprise less dependent on ratings. The news factory becomes more efficient.

This strategy isn't new. In fact, it was invented at ABC News, where Roone Arledge, the legendary former president, produced his way to prosperity by getting 20/20, Nightline, and PrimeTime Live on the air, sharing fixed costs. These days, though, the house that Roone built needs repairs badly. Operating income at ABC News has slid to less than half its peak of about $110 million because Peter Jennings' World News Tonight is no longer the ratings leader, and Good Morning America has all but collapsed. In January the morning show got an unexpected infusion of star talent from anchors Charles Gibson and Diane Sawyer, who take over until permanent hosts can be found. "I can spend all my time trying to close a bureau or consolidate a crew," says Westin, "but that is really small potatoes compared with improving Good Morning America. You can solve an awful lot of problems very quickly with a successful program." For ABC, the model for the future is Nightline, which, with its small, topnotch crew, delivers journalistic excellence and healthy profits; even in a crowded news environment, millions of viewers will stay up late to see what Ted Koppel has to say. Westin's long-term goal is to make ABC News the thinking person's choice.

That leaves CBS News as the underdog in this fight. Heyward says the operation is back on track; Rather's newscast has perked up, 60 Minutes and 48 Hours are holding their own, and profits are growing. In a coup, CBS News, a laggard on the Internet, has struck a deal to replace ABC News as the leading news provider for America Online, generating new revenue. "After some challenging years," Heyward says, "we're closer to our competitors than we've been." Still, CBS has fewer hours of news programming than NBC and ABC, and its morning and evening programs rank third in ratings and ad dollars. That can't sit well with Mel Karmazin, CBS's demanding new CEO, who has shown that he'll buck tradition to drive earnings. (He put Howard Stern on CBS TV stations, remember.) Some Wall Street analysts think Karmazin will shake up the news division before long. "He recognizes that the way they currently gather news needs to be adjusted, given where the revenue is going," says James Marsh, a broadcasting analyst with Prudential Securities.

That's why 60 Minutes II is so important. Prime-time news programs, as a rule, cost less to produce than hourlong dramas, deliver consistent ratings, and seem able to last forever. They are also owned by the networks and so are not subject to escalating license fees. Of course, there is a limit to how many of these shows the audience will support--already, Dateline and 20/20 are losing viewers as they multiply. The other drawback is that the shows attract older viewers who are hard to sell to advertisers. The median age of a 60 Minutes viewer is 56.9, giving it the second-oldest audience on broadcast television, behind CBS's Diagnosis Murder. So 60 Minutes II, which will be shown on Wednesdays, will seek out younger viewers with a slightly younger cast, although it will also feature updates of classic stories from the original.

While 60 Minutes is the granddaddy of the magazines and the journalistic standout, Dateline NBC sets the standard for efficiency and brand building. Lack and executive producer Neal Shapiro have transformed Dateline--once infamous for faking an explosion in a General Motors pickup truck--from a mediocre weekly series into a five-night-a-week franchise that seems able to sprout in any soil. It's got just one pair of anchors, Jane Pauley and Stone Phillips; an army of mostly low-cost correspondents; and the flexibility to offer a potpourri of segments, from the fluffiest of features to breaking news to occasional documentaries. Mostly, though, Dateline skates over dry but important topics like government, politics, social policy, education, economics, and foreign affairs, instead favoring human drama--it's nonfiction entertainment, not traditional news. A recent week's lineup included reports on a ballerina who died of anorexia, the JonBenet Ramsey murder, a woman claiming abuse by a college athlete, a get-rich-quick scam, and the new Elvis biography.

Huntley and Brinkley wouldn't have recognized that as news. On the other hand, when impeachment and Iraq were huge stories, all the prime-time magazines, including Dateline, covered them aggressively. These days, the dream of every network news president is to strip a prime-time magazine across the schedule, say, at ten each night. That way the network would have fewer hours to fill with costly dramas and sitcoms, most of which fail anyway, and viewers could find their news easily. "In the long term, it makes a lot of sense," says ABC's Fili-Krushel. "As people have more choice, you have to make things simpler."

A nightly magazine program might even make covering hard news fashionable again--after all, when you publish a magazine every day, it becomes a newspaper, and good newspapers have defied all predictions of their demise. Indeed, one enduring lesson from the winners in the network news wars--60 Minutes, Nightline, and Today--is that good journalism can be good business too.