(FORTUNE Magazine) – In the past decade broadcast networks have lost so much of their audience to cable giants like ESPN, USA, and Nickelodeon that pundits have wondered about their long-term viability. But like all the best TV plots, this one has a twist: The largest cable networks are now facing fierce competition themselves--from their midsized brethren. Cable as a whole is growing rapidly, but former also-rans like the Cartoon Network (owned by FORTUNE's parent, Time Warner), Court TV (half-owned by Time Warner), TV Land, and Comedy Central are driving the expansion.

This year the middle tier of basic cable networks, which reach between 40 million and 65 million homes, has grown nearly 18%. In the past three years they've popped a stunning 98% (granted, from a puny base). On the other hand, ratings for the biggest networks are scary enough to make a Rugrat cry: Top-tier networks are down 6.5% this year and up just 1% over the past three years.

Why the shift in momentum? The largest cable properties, which once distinguished themselves through innovative programming, have gotten fat and lazy. The midsized networks are now the ones pushing programming limits (check out The Powerpuff Girls, an animated feminist parable on the Cartoon Network). Says Derek Baine of media analysis firm Paul Kagan Associates: "These are the networks that are gaining momentum as they add new subscribers."

This transformation hasn't happened quickly. In 1995, Court TV, for example, was riding the O.J. Simpson and Menendez trials to ratings records. When the verdicts came in, the network crashed; it didn't know how to program without a sensational trial. "As we all know, in normal circumstances those kinds of cases are few and far between," concedes Henry Schleiff, the network's chairman and CEO. The network has found success with a new tack: original shows like Crime Stories; reruns of Cops and Homicide: Life on the Street; and all-crime-all-the-time shows. The plan has worked--ratings are up 300% over the past three years (again, from a small base).

Sometimes it takes just one hit to make a network. Three years ago Comedy Central launched South Park, the animated series about a bunch of foul-mouthed grade-schoolers. The show was an instant smash and gave Comedy Central an identity. The network has spent the past few years trying to use the show as a launching pad for new hits. It succeeded this summer with BattleBots, which pits remote-controlled robots against each other in duel-to-the-death extravaganzas. The Cartoon Network, which has generated buzz from a combination of 30-year-old Scooby Doo reruns, The Powerpuff Girls, and the quirky boy wonder of Dexter's Laboratory, is the biggest success of the group. Ratings are up 30% over last year, and in October the network shared the top spot in prime-time cable ratings with TBS, even though it reaches 15 million fewer households. "Original programming has big benefits when you do it," says cable veteran Herb Scannell, president of Nickelodeon, TV Land, and TNN. "If you're doing it well, it [can] define a network."

Now the network chiefs face the daunting prospect of turning these properties into cash cows. Even with the ratings growth of the past year, the midlevel networks collectively generated $687.4 million in revenues, compared with $4.1 billion for the largest ones. Though these middle-tier networks have been able to parlay their hits into merchandising revenues, they only get a portion of this cash. The Cartoon Network, for example, took in $112.5 million in revenues last year from advertising--compared with $800 million in revenues it generated from Scooby goods. Comedy Central sold $500 million worth of South Park merchandise in its three-year run, ten times the revenue it took in from ad sales last year.

As midlevel basic-cable networks continue to grow, creating their own studios, or tinkering with Webcasts, like Comedy Central, their biggest danger lies in thinking too much like broadcast networks. "As you go forward, larger [cable] networks become more vulnerable because you've got this fragmentation of the audience," says Baine. He's right. In October almost all the bigger cable networks had flat or lower ratings. So while they still have the money to outmarket and outspend the niche networks, they need to figure out a way to outinnovate them.