(FORTUNE Magazine) – Ah, the laments that have been lamented for the broadcast television networks. They were going to be nibbled to death by cable. They were going to be obsoleted by interactivity. They would be swept aside by the Internet, displaced by broadband, made irrelevant by TiVo. They were lumbering giants. Or dinosaurs. Or rodents. "It may be too soon to know who will survive," journalist Ken Auletta wrote at the end of a book about television. "But it is not too soon to conclude that without fresh sources of revenue the once mighty network lions seem as vulnerable and sometimes as bewildered as three blind mice."

That was 11 years ago, and guess what? In a world where there are now 505 national and regional networks measured by Nielsen, and where the typical cabled home gets 104 channels, and where 55% of Americans are wired to the Internet, do you know what people have been talking about lately? Whether David Letterman would bump Ted Koppel off ABC. The Sept. 11 documentary on CBS. The return of Friends for another season. Even that boxing match between Tonya Harding and Paula Jones on Fox.

When it comes to the broadcasters, reports of their death have been exaggerated. This doesn't mean they have solved all their problems--far from it--or that they aren't going through yet another period of wrenching change. Fact is, they are. That's the point. The networks keep on evolving and surviving and even thriving. Dinosaurs, let's not forget, ruled the earth for, oh, just about 165 million years.

If you want to glimpse the future of broadcast television, consider NBC. Its top executives have declared that they can no longer afford to telecast the NFL, NBA, and Major League Baseball. Must-see TV now includes a low-cost, gross-out reality show called Fear Factor in which contestants get slathered with cockroaches, mice, and snakes. NBC's production studio has dispatched film crews to Prague and Johannesburg to make prime-time dramas with unknown actors. And the network is selling repeats of some of its programs to cable outlets where they will show as soon as the following day.

Given this litany, you'd think NBC was struggling--but just the opposite is true. The Peacock has won the prime-time ratings competition in six of the past seven years, and this season it has the top-rated series in Friends, the top-rated morning show in Today, the top-rated late-night show in Tonight, the top-rated Nightly News, and the Salt Lake City Olympics. The NBC network and its stations generated about $1 billion in profits last year--during the worst advertising market in a decade.

If the network riding atop the television world feels compelled to remake itself, imagine what's going on elsewhere in TV. That's what this package of stories is about. Read on to get the full picture of how technology and economics will change what you see, from niche programming to interactivity (finally) to advertising.

At the heart of it all stand the broadcasters. This season, NBC has averaged a 9.2 rating and a 15 share in prime time, meaning that 15% of all homes using TV are watching NBC on a typical night. The seven English-language broadcast networks--NBC, CBS, ABC, Fox, UPN, the WB, and Pax--together attract a 58% share of TV viewing. Says Andy Lack, the president of NBC: "Network television proves every night of the week that it can aggregate large audiences like no one else."

Sure, they're not nearly as large as they once were, but they tower over cable. Cable networks have damaged the broadcasters because there are so many of them--and they enjoy a superior business model, with revenues from both ads and subscriber fees. Bob Wright, who has been NBC's CEO since 1986--back then, the network enjoyed a 28% prime time share--was among the first in broadcasting to recognize the cable threat, because he'd worked for Cox, a cable operator. "We were doing surveys 20 years ago asking people to rank the bills they would pay in the order they would pay them, if you only had so much money," Wright recalls. "Cable was right up there with the mortgage and the electric bill, which is a great place to be."

So Wright deftly steered NBC into cable, creating CNBC and MSNBC, and acquiring stakes in A&E, Bravo, and other cable properties. The other broadcast networks weren't dumb, either. They built or bought cable networks, or, in the case of CBS, merged into a cable company, Viacom, while media was consolidating. Today, as units of media giants like AOL Time Warner, Viacom, Disney, and News Corp., the broadcast networks have a lot more options as they plot their futures.

That said, the broadcasters have done little until recently to attack their two long-standing, basic problems: rising costs and smaller audiences. To be fair, the networks have all reduced overhead, and they have periodically whacked away at spending by their once mighty news divisions. But they have also paid ever-increasing prices for sports and entertainment programs while watching those ratings slide. They got away with it only because the 1990s' advertising market was so robust that sponsors had little choice but to pay more for less.

Now that's over. Last spring, when the big networks sold ad time for the current TV season, they brought in a total of $6.5 billion, $1.3 billion less than the year before. Since then the broadcasters have been trying furiously to fix their core business, either by reducing program costs or airing their content on more platforms or both. Says Lack: "There's nothing like a recession and a two-year advertising slump to get people to say, Let's impose some discipline."

It's about time. According to Wall Street analysts and industry sources, only two networks, NBC and CBS, will make money this year. NBC expects to earn $500 million, and CBS should make $150 million to $250 million. Fox's losses are projected at about $150 million, and ABC could lose $250 million. The huge discrepancies reflect a reality that hasn't changed since I Love Lucy: Broadcasting is still a hit-driven business.

Another thing that's unchanged: Unlike cable, broadcasting is both a national and a local business. The Today show is a valuable franchise because, along with Katie Couric and Matt Lauer, it gives you local news, weather, and traffic. CNN can't do that. The stations owned by the networks are also delivering big earnings. NBC makes $500 million from its 13 owned stations, about as much as it does from the network. Fox's 33 TV stations do even better; last year they delivered $683 million in operating income, easily offsetting the network's losses. Now that the government has eased the limits on how many stations a network can own, all of the broadcasters want to buy more.

Still, as the networks downsize along with their audiences, they are finding that there are some things they can no longer afford. Sports is the best example. NBC walked away from its 12-year-old partnership with the NBA because the league asked for--and got--a 25% annual increase in its television money. The NBA's six-year, $4.6 billion agreement with Disney and AOL Time Warner (parent of FORTUNE's publisher) will put more than 90% of its regular-season games and roughly 80% of its playoff games on cable next season.

Wright and Lack acknowledge that NBC simply can't compete with cable and its flow of subscription fees. "Sports, as we've known them, don't really fit our model anymore," Wright says. Instead of the NBA, next season NBC will show Arena Football, for which it pays no rights fee, instead sharing revenues with the league. Better that than to be Fox, which recently wrote down the value of its sports contracts, conceding that it overpaid by $387 million for the NFL, $225 million for Major League Baseball, and $297 million for Nascar. Morgan Stanley's Richard Bilotti estimates that Big Four networks will lose $619 million on sports this year and concludes, "Sports belong on cable channels." While the Super Bowl, World Series, and NBA finals will remain on free TV, more regular-season and post-season games are bound to shift to cable. That's a reality the broadcasters will have to live with until someone persuades Alex Rodriguez that $250 million is too much to pay even a Hall of Fame shortstop and the costs of TV sports come down.

It might be tempting to conclude that TV news, like sports, is becoming cable's game, but--notwithstanding Greta Van Susteren's overanalyzed face-lift--that's not the case. Take the network evening newscasts. In an era of 24-hour news, they seem anachronistic. They've lost most of the clout they had in the Cronkite days. And because they're driven by personalities, they may well struggle to survive the current trio of anchors. (Average age: 67.) But their viewers, while aging too, are remarkably loyal. NBC's Nightly News attracts 11.2 million viewers, roughly three times as many as CNN, Fox News, and MSNBC combined draw in prime time. This isn't to say that cable news networks aren't a decent business; they are, again because of the subscriber fees. What's more, despite the fact that MSNBC's a bust--it's the No. 3 cable-news outlet and hasn't found a niche--NBC remains in the enviable position of owning broadcast, cable, and Internet news platforms. Those outlets can share talent and newsgathering costs. Lack, who is a former president of NBC News, says, "News remains at the center of what we do well. We're pretty secure in that arena."

Although the models are a little shakier over at CBS News and ABC News, they're in better shape than you'd think after hearing so much about Disney's willingness to bump Nightline off the air. Both have reduced their costs (though CBS is leaner) by, for example, co-financing a satellite uplink from Afghanistan and sharing footage and facilities worldwide. Both also produce programming for cable outlets, which brings in much-needed revenues. In February, for example, CBS News launched a nightly 11 p.m. newscast that airs on Black Entertainment Television, another Viacom unit. "We're moving outside the pigeonholes as a way to expand our reach," says Andrew Heyward, president of CBS News.

The problems in entertainment will be harder to fix, but all the networks are attacking them vigorously. One long-standing practice that they've weaned themselves from might be called "gilt by association"--the idea that anyone involved with a hit show, as a producer, writer, or star, deserves a multimillion-dollar deal to try to create another one. "The days of the costly overall development deals are over, by and large," says Sandy Grushow, who oversees the Fox network and its TV studio. Fewer new shows are being cast with stars, mostly to save money but also because viewers have shown they don't want to see Seinfeld cast members return in second-rate vehicles. To try to reduce the risk of failure, NBC has also decided that it won't buy any new shows from the studios before seeing both a pilot or sample episode and the script for a second episode. Believe it or not, the networks in the past often committed to putting new shows on the air sight unseen.

It's no surprise that the networks fret about their flops, but their hits can cause headaches too. NBC's highest-priced shows include ER, at about $8 million per episode, Friends for $7 million, and Frasier for $5 million. "Terrible deal," Wright says, about the recent Friends renewal, "but we're happy to have it on the air." Hit comedies are so rare and so valuable that networks pay almost any price to keep them, as they will for personalities who prove they can bring viewers to the set. Letterman's new CBS deal is said to be worth $31 million a year, which means that NBC's Jay Leno, the No. 1 late-night host, is underpaid at $17 million. He probably won't be for long.

Programming a network has become like running a sports team with a salary cap. "If you've got Kobe and Shaq, you've got to hold down your costs in other areas," says Grushow. This is why NBC and the other networks have fallen in love with reality shows like Fear Factor, which costs less than half as much as an hourlong drama. NBC's also trying to bring down the cost of scripted shows; a teenage action-drama called Arthur, loosely inspired by the legend of King Arthur, is being shot in Prague with Czech castles as a backdrop and a low-wage work force behind the cameras.

The other craze of the moment is "repurposing," or repeating shows on cable or smaller networks. Talks are under way, for example, to show NBC's late-night show with Conan O'Brien the following day on Comedy Central. Fox has exposed viewers to a drama called 24 by showing it once a week on the broadcast network and twice on cable's FX. With repurposing, the networks are trying to give viewers more chances to see a show, thereby reaggregating the audience they've lost. "The economics of the industry don't justify the expensive programming we're making right now, unless you have additional windows to exploit it," says Jamie Kellner, chairman and CEO of Turner Broadcasting. Studios, affiliates, and advertisers all have doubts about the tactic, but their issues should be resolvable.

Of course, there are risks to all these strategies. If the networks can no longer afford sports, if they run fewer original episodes of their series, if they load up their schedules with low-cost reality programs, and if they share their hits with cable--and we haven't even talked about the way they are cramming more commercials into every half-hour--they could lose their standing as the first choice for most viewers and accelerate their decline. "If we financially squeeze ourselves so hard that we lose our nerve and stop taking chances, the audiences will run away," says Lack. "We've got to deliver great programming."

That sounds like a network-executive cliche, but it's the truth. Great shows--Friends, The West Wing, The Simpsons, 60 Minutes, Everybody Loves Raymond, The Practice, Letterman, Nightline, take your pick--and big events, like the Olympics, the Super Bowl, and the Oscars, are what keep the networks from getting lost in the clutter. Great shows require risk taking and creativity and, yes, lots of money. The networks need to remember that you get what you pay for, or free TV will end up being worth exactly what it costs.

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