(FORTUNE Magazine) – On a sunny August afternoon in Los Angeles, a crowd of teens gathers outside the studios of Nickelodeon, the children's cable television network. They've come to this seedy stretch of Sunset Boulevard, in the shadows of the Hollywood hills, to catch a glimpse of one of the hottest entertainers in popular music--Sean "P. Diddy" Combs. Inside, as the cameras roll and the studio audience cheers, Combs bounds onto the elevated stage and launches into a song from his new album The Saga Continues ..., which recently reached No. 2 on the Billboard charts. Bathed in colored lights and surrounded by an entourage of deejays and dancers, the 31-year-old raps and shuffles and mugs for the cameras. But when the music stops, Combs drops his mike, retreats to a corner of the stage, and begins furiously thumb-typing a business memo on his two-way pager.

That's right: The man formerly known as Puff Daddy isn't just a badass rapper with a predilection for flashy white suits, goofy nicknames, and brushes with the law. He is also an entrepreneur--and an extremely successful one at that. Combs is founder, CEO, and 50% shareholder of Bad Boy Entertainment, a privately held corporation worth an estimated $100 million. In addition to cultivating his own music career (eight million records sold and counting), Combs has produced a stream of hits from the stable of musicians--including singer Faith Evans and teen pop quartet Dream--signed to his Bad Boy record label. In recent years he has extended his reach into fashion (his clothing line, Sean John, had revenues last year of more than $100 million), food (he owns restaurants in New York City and Atlanta), and film (he had a role in this year's Made). In the process, Combs has built an empire, and a brand, around his most tangible asset: himself. "I watched too many other entertainers create something through their own hard work only to see someone else profit from it," says Combs, whose net worth FORTUNE estimates at $231 million. "I decided to figure out how to do what someone else was going to do with my name and my brand anyway. Not just to make money for myself, but to build a lasting enterprise...I pride myself on being one of the greatest businessmen out there."

Combs is not the only celebrity to use his fame as a springboard for business success and vast personal wealth. When FORTUNE compiled its third annual list of the 40 richest self-made Americans under the age of 40 (see pullout list after this story), we discovered, to our surprise, that six entertainers and athletes had joined the ranks of the nation's young and super-rich. Accompanying Combs (No. 22) on this year's roster are fellow rap music mogul Percy Miller, a.k.a. Master P (No. 20); superstar athletes and celebrity pitchmen Michael Jordan (No. 13) and Tiger Woods (No. 40); and actors Tom Cruise (No. 19) and Jim Carrey (No. 36). Several others, including Shaquille O'Neal, Andre Agassi, and Julia Roberts, barely missed our cutoff.

On one level, the rising fortunes of these celebrities can be attributed to the stunning collapse of the Internet economy, which created a number of openings on the 2001 list (of the celebs, only Jordan and Miller had qualified in previous years). Though PC potentate Michael Dell comfortably pulled off a threepeat at No. 1, and the rest of the top five--eBay's Pierre Omidyar and Jeff Skoll, Gateway's Ted Waitt, and Amazon's Jeff Bezos--are a familiar bunch, several of their tech brethren (see the last page of this story) were not so fortunate. Blue Martini Software's Monte Zweben, Ariba's Rob DeSantis, and Sycamore Networks' Rick Barry all watched as their paper wealth, and their places on our list, went up in smoke. Even those who returned for another showing this year are, on average, vastly poorer: The average wealth of the 40 has plunged by almost half--yes, half--since 2000, to $935 million. Omidyar, Skoll, and the Washington Redskins' Dan Snyder are the only veterans of the 2000 list who didn't lose money during the past year.

Yet a closer examination of how the celebrities on our 2001 list amassed their riches suggests that their presence is not simply a case of macroeconomic happenstance. Rather, they were able to capitalize on a colossal power shift within the entertainment world in the past quarter-century. During that period much of the industry's enormous growth was driven by an elite cadre of celebrity athletes, actors, and musicians. The sharpest among them transformed themselves from mere entertainers into powerful brands. As a result, they can demand a much larger share of the power and wealth within the industry--and seek greater entrepreneurial opportunities outside it. "Twenty-five years ago, a star athlete or entertainer may have been a very well-paid employee," says Rick Burton, executive director of the Warsaw Sports Marketing Center at the University of Oregon Business School. "Today they are businesses unto themselves. And their advisors have been shrewd enough to see that their trick ponies were not merely employees but corporations."

Wait just a minute, you say. Haven't celebrities always been way richer than the rest of us? Well, yes--but the difference is far greater now than it was 25 years ago. In 1976, the nation's median household income was $12,686. The best-paid movie star that year, Robert Redford, received $2 million for the film A Bridge Too Far. And basketball legend Kareem Abdul-Jabbar was America's highest-paid athlete, earning $500,000 a season with the Los Angeles Lakers. By 2000, median household income had risen 330%, to more than $40,000. The highest-paid actor, Tom Cruise, garnered $75 million for Mission Impossible: 2, or 3,750% more than Redford. And the highest-paid athlete, at least in terms of salary--basketball's Kevin Garnett--earned nearly $20 million, 3,800% more than Abdul-Jabbar.

It's not just the amounts earned, though, but the manner in which the celebs earned their money that makes this a different age for celebrity wealth. Cruise opted to forgo his usual $25 million acting fee in exchange for a hefty percentage of the box-office receipts--a maneuver that enabled him to triple his earnings. And in fact, Tiger Woods was really the highest-paid athlete in 2000, but less than $10 million came from tournament winnings. He earned approximately $44 million from endorsements, sponsorships, and other off-the-course endeavors, building a business empire around his burgeoning global brand.

Dramatic changes in the sports and entertainment industries helped make these advances in wealth possible. Consider the example of the National Basketball Association. In the early 1980s interest in the NBA was so slight that the final game of the 1980 championship series was not even broadcast on live TV. When current commissioner David Stern took over in 1984, his ploy to save the league was to promote a trio of elite superstars--Magic Johnson, Larry Bird, and then Michael Jordan--rather than individual teams. It worked. But it also shifted the balance of power in those top athletes' favor, giving them leverage to demand ever-increasing salaries and making them ever more marketable. The growth of free agency only accelerated the trend.

Where did all that money to pay those free-agent salaries come from? It came from the escalating rights fees paid to leagues by the broadcast and cable TV networks. In 1982, for example, the NBA got $119 million for a four-year television contract. By 1998, when the last four-year deal was signed, the league took in $2.64 billion. Every major televised sport, from football to hockey to baseball to golf, has enjoyed similarly exponential growth. "It is all based on the theory that sports guarantees the delivery of an audience to a greater extent than any other format on TV," says Neil Pilson, former head of CBS Sports. "In an ever-increasing landscape of channels, it is relatively more valuable now to have, say, the NFL, than it was ten years ago."

Beyond the money earned on the court, sophisticated agents and money managers were emerging to help elite athletes develop investment opportunities outside their fields--and to lessen chances that they would squander their money once they'd earned it. One of the first was Mark McCormack, Arnold Palmer's business manager, who went on to found International Management Group (IMG), now one of the world's largest sports-management companies. McCormack's revolutionary idea was to separate Arnold Palmer the ideal from Arnold Palmer the golfer. "We built a line of products that bore the name Palmer and connoted a quality product--not a winning golfer," says McCormack, "because I knew he would stop winning eventually."

But it was Michael Jordan, 38--the wealthiest sports figure on the planet, with an estimated net worth of $398 million--who best exemplified the notion of athlete as businessman. From the very beginning, Jordan and his agent, David Falk, sought a stake in the companies he endorsed. Jordan's first major deal, with Nike in 1984, tied his compensation to the sales of the shoe that bore his name. There is now an entire Jordan division at Nike, from which he gets a percentage of sales; Jordan handpicks his line's celebrity endorsers, including Derek Jeter and Ken Griffey Jr. In recent years, Jordan has inked similar deals with perfume company Bijan (to launch a Jordan cologne) and with Palm (for a signature version of the popular handheld). When you add up Jordan's endorsement deals with such companies as Gatorade, Hanes, and Rayovac, his lifetime pretax endorsement income tops $426 million, dwarfing the $103 million he made for playing in the NBA for 15 years. (We're not even including the estimated $5 million he netted from book and video sales and the $16 million from his 1996 movie, Space Jam.)

In 1998, the year he retired from basketball, Jordan also began taking equity stakes in private companies. He and two partners started Jump Higher Holdings, which owns two restaurants and plans to open two more this fall. Last year he acquired a stake estimated at $30 million in Lincoln Holdings, a com- pany founded by AOL executive Ted Leonsis, which owns the NBA's Washington Wizards (Jordan is president of basketball operations), the NHL's Capitals, and the WNBA's Mystics.

Most top athletes have to prove themselves in the pro ranks before getting access to endorsement riches. Not Tiger Woods: On the day he turned pro, he signed endorsement contracts with Nike and Titleist worth a reported $55 million total. Of course, Woods went on to prove himself, and then some. In just five years on the PGA tour, the 25-year-old has become, arguably, the greatest golfer ever--and has already collected $25 million in prize money, more than any other golfer in history. "When you're a kid, you just think about winning tournaments and being the best player," he told Adweek last April. "You don't think of the financial side of playing golf.... It's an aspect I didn't really like at first, but I've come to enjoy it."

It shows: He has gone on to sign deals with American Express, Buick, and others, and his net worth is already about $160 million. Earlier this year he renewed and extended his contract with Nike in a deal that could be worth $100 million over five years (Woods' take is tied to sales of Nike golf products). He also agreed to a deal with Disney, reported to be worth at least $20 million over five years, to play in a series of made-for-TV golf events. He hasn't yet found the opportunities in outside businesses that Jordan has, but give him time. "You start figuring out how old he is and the fact that he's in a sport you can play for 30 or 40 years," says McCormack, whose firm represents Woods. "The money will be absolutely world-record-setting."

Long before athletes gained the right to free agency, movie stars had already broken free of the stifling contracts that once bound them to particular studios. In the 1940s the Supreme Court's antitrust Paramount Decree opened up the industry to independent movie producers, resulting in actors' gaining control over their own careers for the first time. So began a steady escalation in pay, and by the time athletes reached the million-dollar annual-salary mark in the late 1970s, the film elite were already commanding many times that for every picture.

Of course, the ultimate measure of control--not to mention the best shot at a real windfall--came when a star could secure a stake in a movie itself. One major development made that easier to accomplish. Media behemoths Viacom, Fox, Vivendi, Disney, and AOL Time Warner--created during a dizzying period of expansion and consolidation among movie studios, record companies, and television networks--came to rely on blockbuster movies costing upwards of $100 million. They desperately needed big stars to market these movies to the public. Rather than committing to $20 million payments upfront, though, the studios decided to share both the risk and the possible reward with major stars by giving them a percentage of the film's gross sales.

Tom Cruise's brand name wasn't strong enough to get him a piece of the action until his 12th film, 1989's Born on the Fourth of July. But when the movie did well, so did Cruise: rather than his then-typical $3.5 million acting fee, he ended up earning at least $10 million. Five years later Cruise figured out how to increase his take even further: He formed a production company with his former agent, Paula Wagner. He produced and starred in 1994's Interview With a Vampire, earning a $12 million salary and a healthy percentage of the box-office receipts. The two Cruise-produced Mission Impossible films in 1996 and 2000 earned him a staggering $155 million--all of it on the back end. With an estimated $251 million net worth (at least until his financial settlement with ex-wife Nicole Kidman is finalized), 39-year-old Cruise is now the wealthiest young actor in America.

It took Cruise years in the business to build his brand. But with the growth in the '90s of the studio blockbuster, says Darrell Miller, a Los Angeles entertainment lawyer, "people who show that they can build and maintain an audience can develop a brand extraordinarily quickly." Such was the case with comedian Jim Carrey. After his first two starring roles, in 1994 hits Ace Ventura: Pet Detective and The Mask, Carrey's asking price jumped from $350,000 to $7 million plus a share of the box office. By 1996 he was commanding $20 million a film plus a percentage. But he entered the stratosphere with last year's How the Grinch Stole Christmas, bursting as it was with merchandising tie-ins like talking dolls and videogames. Though reviled by critics, The Grinch was a huge success: Carrey ended up earning $57 million plus at least $2 million from ancillary products, bringing the 39-year-old high-school dropout's net worth to an estimated $171 million.

Merchandising deals like Carrey's are only the first step in the brand extension of celebrities. Increasingly, the media conglomerates that help create celebrity brands--aided by the enterprising celebs themselves--are beginning to cross-market. So a popular wrestler called the Rock can earn $5 million for acting in the upcoming The Scorpion King, and Jennifer Lopez can hop back and forth between movies and music. Says Bob Sanitsky, a VP at talent agency ICM: "There are all these people whose sole job is to leverage celebrities between one division of a company and another."

Of the celebrities on our 40 under 40 list, Sean Combs and Percy Miller have seized upon the notion of brand extension with the greatest vigor and skill. Both began in rap music (though Combs courts a more mainstream audience), both combined their own performing with producing and promoting others, and both eventually expanded into other businesses, making hundreds of millions in the process.

Miller, 32, is CEO and sole owner of No Limit, a ten-year-old entertainment company with interests in music, movies, video, clothing, and toys. On an August afternoon, he saunters into the marble-and-gilt lobby of the Beverly Wilshire hotel in Los Angeles wearing a red-and-blue T-shirt (from his own clothing line) covered with the name "P. Miller," what looks to be at least a five-carat diamond stud in his left ear, and a mass of gold teeth. He is four hours late. He apologizes, explaining he has been in meetings all day with record company executives. Later he will rejoin the tour of his 11-year-old son, Lil' Romeo, a pint-sized rap star whose career he manages.

Miller grew up in poverty in Baton Rouge and started his company by peddling his first CD from the trunk of his car. Most of his estimated $249 million wealth comes from his 100% ownership of No Limit Records, worth about $179 million. None of his moves outside rap have paid big dividends, but Miller keeps trying. He's excited about a new act on his label: a boy band called Six Piece that he likens to 'N Sync. And he ponders bringing in other investors to help his business grow. "I don't know if I could operate knowing that I have to talk to three people every time I want to do something," muses Miller. "I'm comfortable with what I'm doing, but I know that is the next level."

As they transform themselves from well-paid employees into savvy entrepreneurs, today's elite celebrities are no longer just building wealth; they're building empires. And as the salaries, endorsements, and business opportunities continue to grow, so too will the number of celebrities in the upper echelons of the nation's wealth. Take basketball's Vince Carter. The 24-year-old just signed a six-year, $94 million contract with the Toronto Raptors, is already earning millions more from endorsements, and is seeking entrepreneurial opportunities similar to those of the player with whom he is often compared--Michael Jordan. "We are helping to create an empire," says Carter's agent, IMG's Merle Scott. "A century from now, hopefully, people will talk about the Carter dynasty the way people today talk about the Vanderbilts or the Kennedys. They all had to start somewhere."