(FORTUNE Magazine) – The Metropolitan Opera House in New York had never seen anything like it. When MTV gave out its 1999 Video Music Awards, Paul McCartney made a surprise appearance with Madonna, pop sensation Ricky Martin had the crowd dancing, and rap singer Lil' Kim exposed on stage what comedian Chris Rock referred to indelicately as her "titty." Nearly 12 million people tuned in to the show, making it the top-rated entertainment program in cable history, as well as TV's top-rated show that night.

The MTV extravaganza capped a momentous week for its parent company, Viacom, which had announced two days before that it was buying CBS for $37 billion in stock. Rambunctious, body-pierced Viacom, home of Nickelodeon and VH-1 and Beavis & Butt-head, was taking over CBS, the buttoned-down broadcaster of 60 Minutes, Touched by an Angel, and Diagnosis Murder that had ruled television during the era when the Big Three networks were kings. All the usual forces that drive media mergers came into play--the desire for bigness, the quest for synergy, the outsized egos of CEOs. But more than anything, their deal is about the triumph of cable.

That's because it's not a merger of equals; really, there is no such thing. Sumner Redstone, Viacom's 76-year-old CEO, will control the new company as owner of 66% of its voting stock. He built Viacom by betting on cable, resisting pressure to sell MTV and Nickelodeon in the late 1980s when the company was deep in debt. By contrast, CBS executives either scorned cable or bungled their opportunities to join the revolution until CEO Mel Karmazin and his predecessor, Michael Jordan, came along. They beefed up a weakling broadcaster by adding cable, radio stations, and billboards, which this year will deliver nearly 70% of CBS's cash flow. Now, by selling to Viacom, Karmazin has secured CBS's future--and his own.

The very notion of selling the once glittering "Tiffany Network" to a cable company was laughable just a decade or so ago. (Remember the ridicule heaped on Ted Turner when he tried to buy CBS in 1985?) But CBS sold to Viacom without a fight. "And not only did they not fight it," says John Rash, a media analyst with advertising agency Campbell Mithun Esty, "this time, CBS proposed it."

The fact is, cable has been the most profitable entertainment business of the 1990s, followed closely by radio. That's one reason Redstone and Karmazin, who came up through radio, became rich media moguls. (Redstone owns about $9 billion of Viacom stock, Karmazin about $400 million of CBS, according to the company's latest filings.) Cable's rise is evident across the media landscape. Turner is now vice chairman of Time Warner (parent of FORTUNE's publisher), second-in-command to Gerald Levin, who rose up through HBO. Bob Wright, a Cox Cable executive before taking charge of NBC, counts as his biggest accomplishments the creation of CNBC and MSNBC. Bob Pittman, president of America Online, made his reputation at MTV. And while Michael Armstrong was a technology executive before becoming CEO of AT&T, he then engineered the only two media deals bigger than CBS/Viacom: AT&T's acquisition of TCI for $48 billion and its purchase of MediaOne for $62 billion. Cable deals, both of them.

Ironically, CBS jumped into cable early--too early, it turned out. CBS Cable, a high-culture channel launched in 1981, folded the following year after losing $60 million. Once burned, CBS disdained cable; its ad sales folk distributed a brochure called "The Cable Fable," which argued that cable was overrated. (A top CBS executive once told me he'd refused to subscribe to cable because it would have been disloyal.) By the early 1990s, ABC, NBC, and Fox all saw what CBS did not--that with their core broadcast networks in decline, they needed more shelf space. They also saw that cable networks, even small ones, could make money by keeping costs down, targeting desirable demographic groups, and collecting subscriber fees. Not until 1997 did Jordan and Karmazin lead CBS back into cable by buying two music channels, the Nashville Network and Country Music Television, for $1.5 billion.

Those were the assets that caught Redstone's eye. He talked about swapping Viacom's TV stations for CBS's country music channels, which could use some MTV-like buzz. But Karmazin wanted the bigger deal, and he convinced Redstone--who'd sworn he'd never buy a broadcast network--that CBS's TV, radio, cable, billboard, and Web assets would complement Viacom's cable networks and its Paramount TV and movie studio. "Mel seduced me," says Redstone. "I was originally skeptical, but as I began to see the enormous fit of the assets of both companies, he began to turn me on. This guy is a master salesman."

The merged company will be called Viacom, partly because it doesn't want to be closely identified with CBS. Leslie Moonves, president of CBS Television, has done a great job making the network No. 1 in total viewers, but it remains a poor third in advertising revenues because of its older audience. In all likelihood, CBS will be the sixth-most-profitable network at the new Viacom--behind Nickelodeon, MTV, VH-1, Nashville, and Country Music Television. It accounts for less than $2 billion of CBS Corp.'s $40 billion valuation, some analysts say.

Still, the CBS network is a key promotional platform that can help the new Viacom create value elsewhere. Already, Karmazin has traded ad time on CBS television, radio, and billboards for equity worth more than $1 billion in Internet sites like CBS MarketWatch and CBS SportsLine. "Entertainment companies need different vehicles so they can migrate audience from one to another," says Michael J. Wolf, head of the media consulting practice at Booz-Allen & Hamilton. "Broadcast networks are going to continue to be very valuable platforms for reaching mass audiences. But they are going to have to be coupled with targeted media to deliver specialized audiences."

So the merger makes sense on paper. But mergers involve people as well as assets--just ask Disney-ABC. For that matter, ask Tom Dooley and Philippe Dauman, the well-regarded Viacom deputy chairmen who will leave to make room for Karmazin. Along with the crew from MTV Networks, Dooley and Dauman built Viacom's most valuable hidden asset: a youthful, informal culture bubbling with creativity and fun--qualities not often associated with CBS. There's been much speculation about how Redstone and Karmazin--both hands-on, strong-willed, self-made men--will get along. Just as crucial is the question of what will happen to Viacom's renegade spirit as its cable guys grow up.