(FORTUNE Magazine) – Bob Wright is experiencing technical difficulties. Because his job as president and CEO of NBC requires him to watch a lot of television, he has one VCR in his office, one in his car, and another in his Connecticut home. He owns four or five PCs, subscribes to DirecTV's satellite service with its 200-plus channels, and just got a personal video recorder from TiVo. His Samsung cell phone delivers e-mail, news headlines, and stock quotes on demand. So what's the problem? His wife, Suzanne, has had enough. "I'm always telling him, 'Bob, turn that off, whatever it is,'" she says.

And that's the least of Wright's problems. After making General Electric's NBC the most profitable network in broadcasting and deftly expanding into cable with CNBC and MSNBC, Wright--along with the rest of the TV industry--is facing an onslaught of new competitors, all driven by digital technology. Microsoft and America Online have invaded the living room with WebTV and AOLTV, services that bring the online world of chat, e-mail, and games to the TV set and soon will deliver interactive TV shows. TiVo and ReplayTV are selling digital video recorders that liberate viewers from network schedules and make it easy to skip commercials. Dozens of well-funded startups, betting that high-speed delivery of Internet video is just around the corner, are signing up Hollywood talent and developing talk shows, cartoons, short films, and personalized newscasts for the Net. If broadband truly catches on, even a network's viewers will become potential competitors--say, when one of them decides to post a home video of a soccer game online so that the kids on the team can watch.

All of these interlopers (except the soccer mom) want to grab a piece of the $55 billion to $60 billion in advertising revenues generated by the television industry each year. Their rallying cry is personalization--the notion that viewers will watch what they want, when they want, on whatever device they want and also be able to create and distribute their own content.

"Everyone can be a broadcaster," says Mark Cuban, a founder of Broadcast.com who now oversees digital broadcasting for Yahoo. "You write me a check for $5,000, and I'll put you in front of a camera. People will watch Internet video interchangeably with traditional TV." Margaret Heffernan, president of I-Cast, an Internet site backed by CMGI that will feature member-generated movies and music, says, "This is an incredibly, incredibly democratic medium, and no one's seen anything like it."

What's clear is that the net impact--no pun intended--of the new technologies will be to shift power to consumers at the expense of traditional networks. "We are at the very, very early stages of an absolute and fundamental change to television," says Barry Schuler, president of AOL Interactive Services, who oversees AOLTV. Schuler likes to argue that until now television has been a closed system, gated first by the availability of broadcast spectrum and then by the capacity of cable wires. For the most part, network programmers and cable operators decide what you can see and when you can see it. The new competitors will use technology to burst open the gates, by storing lots of digital video on servers--located either on the Internet, where programs could be viewed at any time, or in electronic boxes in the home, like the ones being sold by TiVo and ReplayTV. "Someday in the future," says Schuler, "your choices about what's on TV could be in the millions, the way the Internet is today."

Signs of a revolution are everywhere. Some 3,500 of the 17,500 people who attended a recent TV industry convention in New Orleans came from technology companies. In February, Excite@Home, the high-speed-access company, sponsored a celebration of film shorts at the U.S. Comedy Arts Festival in Aspen, Colo., to promote broadband content. And, of course, one reason that America Online has agreed to acquire Time Warner (FORTUNE's parent company) was to marry interactivity with news and entertainment programming.

And the traditional networks? They're furiously counterattacking--fortifying their own Internet sites, experimenting with interactive programming and advertising, investing in new media companies, fixing their flawed business models, and, not least, taking risks in prime time, for better or worse. That's why your TV set may appear to be slowly losing its mind.

It all began with Who Wants to Be a Millionaire, the game show with Regis Philbin, which now airs three times a week, averages close to 30 million viewers, and has propelled ABC to the top of the Nielsens for the first time in years. Millionaire has spawned a book, a CD-ROM, and a Website where viewers will soon be able to play along from home, as well as a spate of ripoffs on rival networks. The other night, Fox aired a two-hour special called Who Wants to Marry a Multimillionaire. Fifty women competed in a pageant at a Las Vegas hotel to become the bride of a 42-year-old Californian. Yes, there was a swimsuit competition. The bride did not meet the groom until moments before they were married by a judge.

If you think that's weird, wait until you see what CBS has in store for summer. Remember the movies EdTV and The Truman Show? The Tiffany Network will broadcast something similar when it remakes Big Brother, a Dutch show that followed the lives of ten strangers confined to a house in which cameras and microphones tracked their every move. In the CBS show, participants will try to spend 100 days together in isolation without phones, newspapers, or TV. At intervals, viewers at home will vote their least favorites out, and the last person remaining will collect a cash prize. The Big Brother remake will be exposed 24 hours a day on the Internet--where sex and nudity drew lots of Dutch viewers--and in half-hour segments for 100 nights on CBS.

If that sounds too domesticated for you, CBS is planning another "reality" show called Survivor, in which 16 men and women will be deposited on a desert island near Borneo for 39 days. Starting with just the clothes on their backs, they will have contests to win prizes provided by sponsors--a pair of Reeboks, a bottle of Budweiser, or a night inside a GM car.

"Clearly, television is going through rapid change," says Leslie Moonves, president and CEO of CBS. "People are looking for something different."

If nothing else, the networks' response reflects lessons learned from the last technological revolution to rock television--the rise of cable in the 1980s. Broadcasters who underestimated cable's potential paid a stiff price as upstarts like Turner, Discovery, and Viacom built great franchises by narrowcasting to news viewers, kids, or music fans. The cable competition transformed the over-the-air networks from cash cows into low-margin businesses. (Viacom did so well with MTV and Nickelodeon that it acquired CBS last year.) Of the seven broadcast networks--NBC, ABC, CBS, Fox, the WB, UPN, and PaxNet--only NBC and ABC are currently making more than token profits. All the networks remain valuable, though, because they drive other businesses, like TV stations (every network wants more), cable (NBC's MSNBC, ABC's new SoapNet), program syndication (where Fox makes millions by selling reruns of The Simpsons), and the Internet.

No one could argue that the networks have ignored the Net. "We have embraced new media," says Pat Fili-Krushel, president of ABC. "We're all headed towards convergence." Wright agrees: "NBC is competing as much with the AOLs and Yahoos of the world as we are with ABC, CBS, and Fox." Every network has an Internet strategy, and they've enjoyed some success. The most visited Internet news site is MSNBC, the top sports site is Disney's ESPN SportsZone, and CBS has profited handsomely from stakes in Internet sites like CBS MarketWatch and CBS SportsLine.

But all of the networks lag far behind AOL, Yahoo, and Microsoft when it comes to overall audience reach on the Internet, and they aren't likely to catch up. Even if they could, that wouldn't shield their core television business from the coming tumult.

Threats to the status quo will arrive in many guises. The TiVo and Replay boxes would, at first glance, seem to be good for the networks; far easier to use than VCRs, they allow viewers to record a show (or an entire season of a show) with a single click. Viewers can also pause live television and resume watching whenever they like, and TiVo's box learns your preferences and recommends shows. Disney, Time Warner, NBC, and CBS all invested in TiVo, Replay, or both, and customers who have the boxes--about 33,000 in all were sold last year, when they debuted--say they're watching more TV.

The trouble is, TiVo and Replay users can speed through commercials when they watch prerecorded shows. "I know a guy who bought a TiVo unit for Christmas, and he hasn't watched a commercial since Dec. 26," says

Aaron Cohen, executive vice president of Horizon Media, a New York advertising firm. "That scares the hell out of me." As viewers get comfortable with the boxes, more of what they watch is recorded; they turn to their own library instead of being dependent on any given night's lineup. "This fundamentally changes your attitude towards television," says TiVo CEO Mike Ramsey. "I watch zero live TV."

As this technology spreads, network schedules will become less important. "The whole concept of program flow is an obsolescent model that will be replaced by time-shifting," says Jack Myers, chief economist for the Myers Group, a media research firm.

That's a problem for the networks. Right now they use their hit shows to launch new programs and protect weak ones. Scheduling an unproven show between two hits is called "hammocking," and it works; NBC on Thursdays can put just about anything between Frasier and ER and draw a big crowd. But if audiences no longer flow through the schedule or watch a program "because there's nothing else on," the networks will lose money on all but their most popular shows. Even TiVo's Ramsey concedes that a ruthlessly Darwinian prime-time environment will shake up the business. "If people won't watch the filler," he says, "that certainly poses a challenge to the networks and the studios."

Eventually, digital storage will be built into many TV-related devices, and into the sets themselves. The latest version of WebTV, sold in combination with the satellite TV service EchoStar, offers as many as 500 channels of programming, an interactive program guide, Web access, and 14 hours of recording capacity. Over at AOLTV, Schuler can't wait to get his hands on Time Warner's TV, cable, and movie assets. "We'll be creating new channels," he says. "You can expect to see an interactive CNN, interactive HBO, new Cartoon Channels." These could deliver Web-enhanced television--giving CNN viewers background information or the chance to vote in instant polls--or they could offer Larry King, Looney Tunes, and The Sopranos on demand.

Broadband on the Internet poses an even more sweeping challenge, albeit one that's still years away. Internet programmers say that just as cable went after over-the-air television by narrowcasting, they'll go after both broadcast and cable with nichecasting--potentially, even targeting audiences of one. Hollywood is awash in venture-funded entertainment firms, like Shockwave.com, Icebox.com, z.com, and Voxxy.com, that have dangled stock options to recruit such talents as director Tim Burton, South Park creators Trey Parker and Matt Stone, Friends star Jennifer Aniston, and comic book veteran Stan Lee. The news and sports categories are just as overcrowded. (See box.)

If these upstarts enjoy even a fraction of the success they envision, the viewing audience will continue to splinter. For the broadcast networks, the danger is that their ratings will fall below the threshold that, even now, makes them an all but essential media buy for advertisers (especially dot-com companies) that want to introduce new products or build brands in a hurry. "The most significant concern of marketers is the networks' losing their ability to aggregate mass audiences," says John Rash, a senior vice president at Campbell Mithun Esty advertising in Minneapolis. Cable networks, too, face erosion; more than half of the 39 cable networks measured by Nielsen were flat or down in prime time last year.

To survive, the networks will have to adapt to the interactive era, as many have begun to do. NBC and ABC in particular are doing lots of experimenting with enhanced television, which combines TV and the Web, and with advertiser-driven technologies designed to combine the reach of the networks with the interactivity of the Internet. Says ABC's Fili-Krushel: "We'd like to give advertisers the opportunity to turn our viewers into their customers, so after seeing an ad you can download a coupon or get more information about a car." Companies like Microcast, WinkTV, and Digital Convergence.com all offer ways to either target commercials better or add interactivity, and they're eager to partner with the big networks. As media consultant Jack Myers puts it, "The real key is bringing technology to where the eyeballs are already viewing."

The news isn't all bad for old-fashioned TV either. Here's one surprising fact: Despite the Internet, people are actually watching more TV than ever--seven hours and 24 minutes a day in the average household, Nielsen says, up eight minutes from five years ago. Here's another: Thanks largely to Millionaire and dot-com advertisers, ABC generated $1 billion in quarterly revenue for the first time ever during the last three months of 1999. And one more: In a single day, Jan. 30, 2000, when ABC broadcast the Super Bowl, the network took in about $150 million, more than what SportsLine.com, iVillage, TheStreet.com, Quokka Sports, and Salon.com combined made in all of 1999. With those revenues, the big broadcast networks can still afford to outspend any of their rivals for the best programming, which, in the end, is what should matter.

The networks have a few other advantages, too. They've built strong brands. They've got broad reach. And, they know something about how to package news, sports, and entertainment for audiences--otherwise, they wouldn't have survived the arrival of cable, VCRs, the remote control, videogames, and PCs.

The thing is, people don't want too much choice. The word from Nielsen, again, is that no matter how many channels you give people, they watch about a dozen and ignore all the rest. Particularly as work life gets more hectic and complicated and high-tech, plopping down on the couch after dinner retains its time-honored appeal. NBC's Bob Wright may be wired all day, but he says, "I can't imagine having to go home and program everything myself." Happily for the networks, at least for now, few of us look forward with any eagerness to an evening of watching technology.

REPORTER ASSOCIATE Irene Gashurov

WRITE TO MARC GUNTHER AT mgunther@fortunemail.com