(FORTUNE Magazine) – The casting of Terry Semel--a movie mogul!--as Yahoo's new CEO is a message about what the company wants to be: a diversified media player that makes money the old-fashioned way--charging customers fees for what they see onscreen.

Hiring Semel, the former co-CEO of Warner Bros., is a retro, but clever, move. Yahoo has big problems: declining ad revenues, an overreliance on free services, vanishing profits, a stock 92% off its high, and dysfunctional management lulled by an aloof CEO, Tim Koogle. "Gosh, this is a company filled with brilliant tech people," says Semel. "The company was looking for someone with global experience who's good at managing people, creating brands, and developing multiple revenue streams--and who, in that mix, has an appreciation for creativity."

Semel beat out some tough competition. Guided by Spencer Stuart recruiter Jim Citrin, Yahoo's search committee cast a wide net--altogether 140 were considered, 30 seriously, including Coke ex-president Jack Stahl, a couple of Cisco alums, and several executives at AOL Time Warner (parent of FORTUNE's publisher), whose fee-based model is proving, at least in the most recent quarter, an engine for strong profits. The headhunters won't say, but as the board decided that Yahoo is primarily a media company, it focused in on players such as Disney theme parks boss Paul Pressler, NBC West Coast President Scott Sassa, and Semel--who everyone thought was unlikely to want the job. "Crazy, huh?" says the new CEO.

Semel, 58, joined Warner Bros. out of college and, at the helm with Bob Daly for 19 years, expanded the studio's revenues from $750 million (about what Yahoo is generating now) to $11 billion--by adding businesses like home video, TV, and consumer products. When he left Time Warner at the end of 1999 (with stock and options believed to exceed $200 million), he knew his film career was over. Says his best friend, Daly, who's now chairman and managing partner of the Los Angeles Dodgers: "On our last day at Warner Brothers, Terry and I put our hands and feet in cement outside Graumann's Chinese Theater, which was like going into the Hall of Fame."

Semel was still trying to figure out what he wanted to do when, in mid-March, one week after Yahoo announced the CEO search, co-founder Jerry Yang popped the question over lunch: "Would you be interested...." Recalls Semel: "I told him, 'I hadn't given it any thought.'" Semel never seemed the Internet type--at Warner Bros., he scarcely used e-mail!

Now we can look forward to a multimedia drama, with a fair dose of suspense. Can this L.A. mogul adapt to Silicon Valley? "My office will be the same size as everybody else's--well, not an office...what do you call it?" A cubicle? "Yeah, a cubicle," says Semel, who will move his family near Yahoo's Sunnyvale headquarters. (Old pals expect he'll use his G-4 to visit his Bel Air and Malibu homes.) Will the new boss learn to live with Yahoo's brash president, Jeff Mallett? Our bet: No--Mallett, miffed that he wasn't considered for the top job, will be gone by the fall.

Led by Semel, Yahoo is sure to speed up its shift to fee-based music and finance services--and, in time, streaming entertainment. To compete with AOL, he might buy an ISP (Yahoo to EarthLink, Hello!). And while Semel insists he has "no interest in leading this company to be sold," a buyout or a merger appears inevitable. Top prospects are Viacom, Disney, News Corp., Vivendi Universal. Any way you play it, one thing is certain: The moguls will be watching this show.