(FORTUNE Magazine) – Let's play a little numbers game: on Aug. 14, Madden NFL 2004, a videogame pitting real-life NFL teams against one another, appeared on retailers' shelves. Within three weeks, the game grossed $100 million--two million copies sold at $50 a pop. In roughly the same period, the summer hit movie Seabiscuit returned $78 million. Madden doesn't just have better numbers, but better legs: By the time the next version comes out a year from now, gamemaker Electronic Arts will have shipped four million copies of Madden 2004, raking in $200 million. By comparison, last year's Oscar-winning Best Picture, Chicago, has taken nine months to bring in $171 million at the box office.

The average Madden 2004 player will spend, conservatively, 100 hours mastering the game over the year. That's four million sets of eyeballs times 100 hours. HBO's mobster smash The Sopranos drew an average of 11 million viewers for all 13 one-hour episodes last season. That's 143 million viewing hours for the most popular show on cable TV. Do the math.

There's more: Each of the 13 songs by major artists on the Madden 2004 soundtrack--groups like Blink-182, Alien Ant Farm, OutKast, and Nappy Roots--will burn themselves into the brain of each player more than 100 times, creating more impressions for new artists than they can get on radio or MTV. As a result, stars like 50 Cent and Mya are releasing new songs on videogames sometimes weeks earlier than the drop of their full CD. By the time the album comes out, demand among the kingmaking 16- to 34-year-old age group--in other words, the videogame generation--is stoked. And Madden isn't even at the top of the pile when it comes to game sales.

If you've got kids, or hang around with them, you knew videogames were big. But you may be shocked by how big they are, and not just in terms of the multibillion-dollar revenues and profit margins that are the envy of major entertainment companies. Games are becoming culturally pervasive, stealing time and dollars from other consumer entertainment options like movies, television, and, ahem, magazines. On average an American will spend 75 hours this year playing videogames, more than double the amount of time spent gaming in 1997 and eclipsing that of DVD or tape rentals today, according to market research firm Veronis Suhler Stevenson. Of the other forms of entertainment, only Internet usage is expected to grow faster than videogames--a fact that the videogame makers plan to use to their advantage.

And with time comes money. Though the global videogame market was just $28 billion in 2002, some people think it's on track to rival the movie, music, or television industries, perhaps by the end of this decade. Music sales have been falling in recent years, the moviegoing experience hasn't changed that much since Gone With the Wind, and network TV is on the skids. The games business has been racking up double-digit growth rates for the past decade, even through the recent tech slump.

Long considered to be the toy department of the entertainment business, the videogame industry is now starting to flex its muscle. In Hollywood, movie studios and music producers increasingly make sure they have the support of game companies before starting projects. And execs are jumping ship to go work in what is now called interactive entertainment. The tech world, too, is taking notice. Companies like Sony, Microsoft, and Nokia are placing huge bets that videogames will open lucrative new revenue streams worldwide. Their efforts promise to bring a new generation of consoles that in just a few years will make the look and feel of games virtually indistinguishable from television or movies.

But that's the future. A more immediate test starts this fall. In the coming months, several of the most powerful videogame software and hardware makers are initiating their boldest--and riskiest--moves to harness the power of the Net and the wireless world. Their goal is to create what could become virtual, ubiquitous gaming worlds.

And the odds are they'll pull it off. The big-spending youth market can't get enough of these games. According to a recently released study by the Pew Internet & American Life Project, 70% of last year's college students played videogames at least occasionally. Asked whether they have ever played videogames, the student response scored 100%. "Computer, video, and online games are woven into the fabric of everyday life for college students," the report concluded. "Gaming is a part of growing up in the U.S."

Those aren't just adolescent boys blasting Hell Knights on Doom or stealing stretch limos with Grand Theft Auto. One computer game, The Sims, has sold close to 20 million copies, counting sequels and spinoffs, and its main audience is teenage girls. At any given time, 30,000 people are playing pool online at Yahoo Games. Thousands more are playing card games on AOL Games, MSN Games, or Gamespot. According to Nielsen/NetRatings, more than 35 million people visited Internet game parlors last month.

"Lots of people are astonished; they don't really understand the pervasiveness of computer-based gaming," says Tom Melcher, CEO of There, an online gaming and communications service launching next month with backing from major cable and telecom companies. "It wasn't something they grew up with. Now, I'm 40, and I can remember a time when there weren't any electronic game devices at all. But for kids who came of age in the 1980s and 1990s, they can't remember a time when there were not game machines all around them."

That's not hyperbole. More than half of American households have some sort of game machine, like a Sony PlayStation, a Microsoft Xbox, or a portable Nintendo Game Boy Advance. As new and better machines roll out, consoles will become a fixture in more and more living rooms.

Already, videogame culture is almost completely embedded in the lives of people under 30. Consider the fierce competition among music stars and professional athletes to get on the cover of--no, not Sports Illustrated, Rolling Stone, or the Wheaties box--the videogame package. "I mean, this is a dream come true, for me to be on the cover of Madden NFL and be part of the game," Michael Vick, the superstar quarterback for the Atlanta Falcons, told the Sporting News this summer. "It's something you think about as a kid, but you don't think it will ever happen."

No company better tells the tale of the new power in video games than Electronic Arts, the $2.5-billion-in-revenues monster of sports, movie, and action titles. From its grassy campus in Redwood City, Calif., the company dictates where the industry is heading and how it's getting there. And the man at the machine is Lawrence Probst III, chairman and chief executive of EA. Tall and trim, Probst is one of the grownups in the maturing world of videogames. He is described by colleagues and competitors alike as hard-nosed but never rough-edged. In an industry that mints money on guns and girls, Probst refuses to include gore or raunchy graphics in EA games.

But trash talk, that's another thing. With the same cockiness one might find in the EA game Def Jam Vendetta, Probst vows that his company will become the "biggest and best entertainment company in the world."

Bigger than Disney, bigger than Viacom, bigger than AOL Time Warner (the parent company of FORTUNE's publisher)? Probst just smiles. Sure, its sales wouldn't even service AOL's debt load. But EA is drubbing those giants when it comes to return on invested capital: 42% to AOL's 5%. It's a pure digital play and doesn't have to worry about things like movie studio backlots, cable pipes, or theme parks. It's also the first stop when those companies want to license their content. They know EA has the power to move millions of games. Among the company's franchises: Harry Potter, The Lord of the Rings, James Bond, and Superman. J.K. Rowling, Harry Potter's godmother, even writes original story lines for the games. Investors have bought into the EA story: Its stock recently hit an all-time high of $90, making the $13.2-billion-market-cap company the world's fourth-largest software maker, behind Microsoft, Oracle, and SAP.

The company has the same global scope as those all-work-and-not-much-play software giants. EA maintains development studios in Europe, Canada, the U.S., and Asia. Games are culture-specific; EA's FIFA Soccer is every bit as popular in Europe as Madden is in the United States. Through its breadth EA can localize games to an unmatched degree; fans of the smallest football franchise in Scotland can buy FIFA Soccer and see their team, stadium, and players--even stadium signage. No other software company, not even Microsoft, has EA's ability to launch new titles on multiple platforms (PS2, Xbox, GameCube, PC, Game Boy), in multiple countries around the globe, in more than a dozen languages, all on the same day. And under the watchful eyes of Probst's lieutenants--president and COO John Riccitiello and president of worldwide studios Don Mattrick (for more on Mattrick, see our 40 Under 40 list)--the inherently flaky process of game design is kept predictable, more cost-effective, and more productive.

Unlike some other game publishers that work almost exclusively with independent developers, EA has built an in-house creative team, drawing many of its newest employees from the top ranks of the movie and music industries, including senior execs from Dreamworks Interactive, Industrial Light & Magic, and A&R Records. Certainly they are attracted by the creative opportunities of the new medium, but the money doesn't hurt. Thanks to the rise in its stock price and the use of options, the company has been minting millionaires at a rate not seen in Silicon Valley since the bubble.

Still, there's a difference between being hot and staying hot. The videogame industry is highly cyclical. It surges with the introduction of each new generation of game consoles, then slows as the platforms mature--it's in one of those slowing cycles this year--and rockets even higher when next-generation game machines arrive. Over the past ten years, however, EA's been able to grow at an annual compound revenue and profit growth rate of more than 20% by choosing solid, renewable game franchises, focusing on quality, hiring the best people, and banging out hits on all platforms month after month. "We're the Yankees of this business," Probst says. "You look at something like the Yankee tradition, and that's something to be admired. The dynasty, that's what we're about."

Probst thinks EA's dynasty--as well as prospects for the industry as a whole--will reach new heights by harnessing the full power of the supercharged entertainment consoles that Sony and Microsoft are readying for launch in 2005 or 2006, and by following closely in the wake of broadband's spread. It's in that last area that Probst is making his next big move.

Next month EA is formally launching EA Sports Nation, an online service that will allow tens of thousands of network-enabled PlayStation 2 gamers to compete against one another or teams of players across the Internet, starting with NCAA and Madden football but expanding in coming months to include every one of EA's sports franchises, from Tiger Woods PGA Tour to NASCAR Thunder. There will be tournaments, leagues, rankings, laddering systems, and stats. Buy the game, plug it into a network-enabled PlayStation 2, and pick an opponent from the thousands waiting to kick your--well, to test your skills. The pricing structure is still being decided, but in the back of everyone's mind is the possibility of offering prizes, perhaps even cash payments.

EA's rivals are more cautious, but planning to jump in if EA's plan works. "The thing I'm most excited about is prize play and cash play," says Bobby Kotick, CEO of Activision, a game publisher that is likely to score its first billion-dollar revenue year this year. "When you reward people, that's going to open up a new universe of revenue. It's the gaming component of gaming."

Even without cash incentives, thousands of "preseason" players are gathering simultaneously each night to square off against one another in an EA Sports Nation testbed, lured by the fact that it's more fun to play against another human being than against an impersonal computer. "Our goal is to generate hundreds of thousands, and hopefully millions, of registered users playing EA Sports products online," Probst says. "We think that's pretty compelling and a pretty powerful vision."

This isn't the first time someone has tried to draw tens of thousands of players into a single online environment. Some 250,000 people already pay $10 a month and spend an average of 20 hours a week--yes, a week--wandering around in a virtual world called EverQuest. EA even tried its own version earlier this year with The Sims Online. It invested hundreds of millions of dollars to build the EA Online division and rolled out a virtual area for players to form Sims communities and socialize. The company prepared for as many as a million people to sign up. It didn't come close. Just under 10,000 are now subscribed, paying $9.99 a month. Probst thinks the sports universe will do better because the games are more fun, the players have their own credit cards, unlike TSO's big teenage clientele, and because people simply like to compete.

But don't just take EA's word for it. Microsoft, the world's most ferocious software competitor, wants in as well. Just before Labor Day, it launched XSN, the Xbox Sports Network, for Xbox owners who subscribe to the Xbox Live service. "The online experience, the ability to create virtual communities online, is going to be a much bigger part of the industry going forward," says Robbie Bach, who leads Microsoft's Xbox team. But don't look for any EA Games to be part of that community. Why? Neither Probst nor Bach would comment on specifics, but EA says Microsoft wanted control over the games, the players, and all the money.

"They're not going to give it away for free," says Probst. "Nor are we going to give away our content for free."

It's a show of EA's clout in the industry that it is willing to tell Microsoft to take a hike, but it's also a risky move for EA. Unlike the PlayStation 2, which has a clumsy, optional online adapter, the Xbox was designed from the chips up to be a broadband gaming device--and Microsoft is investing $2 billion over the next five years to perfect the box. If the Xbox's technical superiority over the PlayStation 2 makes XSN the online sports network of choice, EA could miss out on a potentially huge market.

The clash of titans isn't just happening online. Many videogame companies are also rushing--sometimes at the urging of telecom companies--to develop wireless gaming. The migration to so-called 3G phone networks has cost telecom service companies, like Sprint and Orange, billions, but it has done little to drive in new business. Getting people hooked on gaming over their phones or other devices, the thinking goes, would get them hooked on paying big bills. And unlike PCs or game consoles, which can keep players engaged for hours on end, mobile game devices would be used for those five-to ten-minute gaps while waiting for a bus, say, or while stuck in a boring meeting.

"There are a lot of potential growth drivers over the next five-, six-, seven-year period," Probst says. "And we think we're going to keep this business growing faster than the movie business, faster than the music business or any other form of entertainment business. So yeah, we're very bullish."

The light-speed growth makes it tough for many to keep up. A popular theme in videogames is the small band of rebels fighting against the evil empire, facing overwhelming odds. The Jedi Knights challenge the ruthless Federation, the lone Marine takes on an army of demons. In the real world of videogames, however, the little guy gets mashed and eaten.

Blame it partly on the push toward online universes, complex games, and increasingly demanding players. Keeping up--and at the same time being able to handle global marketing and distribution--is forcing smaller game-development companies to consolidate or partner with bigger companies like EA, Activision, THQ, Take Two, or Atari. Just as there's still room for independent filmmakers in the era of big movie studios, however, there are still game developers who refuse to be owned. But the bets are huge, and one miss can mean game over.

For a good example of that, walk past the bloody skulls and severed limbs (plastic, of course) that decorate the offices of id Software in Mesquite, Texas. id is one of the few remaining small software developers that still calls its own shots. If EA is the superego of the game-software industry, id is the, well, id. But even this company, which practically invented the concept of gratuitous violence with its gory first-person shooter titles--including Doom, Quake, and Return to Castle Wolfenstein--has faced the reality that they're involved in big business. Todd Hollenshead, the ponytailed CEO who came over to id from Arthur Andersen ("My friends said, 'Todd, video games? Isn't that a little dicey?'") runs a lean company, outsourcing almost everything that isn't directly related to game design. Although it has a licensing and distribution agreement with Activision, id retains total artistic control and makes only the games it wants to make. Unlike Activision, which pumps out enough successful titles to sustain a dud or two along the way, the two dozen employees at id know that if their next game fails to sell, the company might not survive.

Right now, they're worried about just having a game. The next big release, Doom III, has already been delayed past its original target date of the 2003 holiday season. John Carmack, the company's leader and a legend in the game-programming business, says the game will be finished when it is finished. With the company's independence dependent on a successful game, Carmack says making sure Doom III rocks is more important than meeting deadlines. Even so, the complexity of game design today has reached the point where for the first time he's had to hand off major chunks of code-writing. "The industry has become more and more about marketing and maximizing profits, which has never been our explicit goal," says Carmack. "I had more fun when it was 'Let's take a really cool concept and wrap a whole game around it,' not 'Let's take a market survey.'"

For now, Carmack is also protected by the legions of fans who love id's shoot-'em-ups. At the company's QuakeCon gamefest last month, 4,500 gamers gathered in a Dallas hotel, drawn from all corners of the U.S. and as far away as Japan, Sweden, and Russia. Some 2,000 of them lugged their own computers to the convention for a chance to play network death matches with the world's top PC game players, often going without sleep for 24, 48, or even 72 hours. There were, of course, more than a few of the odd-looking, hygienically challenged game fanatics who serve as the common stereotype of the typical hard-core gamers. But there were also families, and couples, and mothers who drove their kids cross-country for a chance to socialize with online friends.

When the family crowd starts showing up at Doom events, you'd better believe Hollywood is paying attention. Increasingly, movie studios are working hand-in-hand with game companies, recognizing that a popular game can enhance the value of an already valuable intellectual property, like James Bond or Spider-Man. Indeed, the movie-game synergy is becoming so common, and technically complex, that scenes are often filmed just for the game. Film stars are increasingly asked to record dialogue for videogames, and many are now required--or in the case of big stars, compensated handsomely--to submit to extra filming and special sessions in a "mo-cap"--motion-capture--studio just for their game personas. During a recent visit to EA Vancouver, the soundstage was being set for Dame Judi Dench, British thespian and now Bond girl.

Crews from Shiny Entertainment, a division of Atari--the legendary brand was acquired by the French gaming company formerly known as Infogrammes--spent literally months on the set of this year's twin Matrix movies, for example, and some scenes in the film are understandable only to those who play the Matrix game. A forthcoming Matrix Online game uses exact movie sets, right down to the pigeons on a playground, and required more detailed cityscapes than even the movies demanded.

But as the gaming industry has started copying--and superseding--Hollywood, it has also started to take on many of its bad habits. The rising cost of developing games--several million dollars per title for top-tier games, and $20 million or more for some titles like The Matrix or The Sims Online--has forced the larger game companies like EA and Activision to focus almost exclusively on franchise titles or movie tie-ins like Spider-Man or Shrek. Sequelmania in the game business is even more rampant than in the movie business. Take Two Interactive's Grand Theft Auto 3 was 2001's Game of the Year by acclamation, despite--or perhaps because of--its combination of violence and salaciousness. It's no surprise that an online sequel is rumored to be in development.

The growth and popularity of the games industry has its drawbacks. As top-tier games get more complex, not everyone is willing to spend the 20 to 30 hours it takes to navigate a game successfully or has the patience to learn complex controls. Even in game-happy Japan and Korea there are reports of declining software sales, citing complaints about the complexity of new games.

A number of software companies, mistakenly thinking that the global economic downturn would not affect the moonshot growth in game sales, overstocked the retail channel in 2002 and prompted an inventory glut. The same fate befell Nintendo, which recently suspended production of its GameCube console until an unspecified inventory backlog is absorbed.

That's not stopping the gamemakers from pressing ahead. Most in the industry think they can avoid the mistakes of the past by relying on the increasing collaboration with storytellers and musicians from Hollywood and by banking on the inexorable increase in technology. Example: There are as many polygons--the most basic picture element in a game graphic--in a single football in Madden 2004 as there were in an entire screen of Madden 2002, including players, grass, stadium--everything. And though Sony hasn't revealed details yet, Ken Kutaragi, the head of Sony's game division, says the next-generation game console could have as much as 1,000 times the graphics processing power of today's PlayStation 2. To get there, Sony is taking a page from supercomputer makers: Its new machine will almost certainly reach out over the Net to tap unused cycles on other Sony machines. The company is working with IBM and Toshiba to develop a new processor that can handle the chore.

To put that in perspective, the $300 home game console of 2006 could have the ability to render lifelike images in real time--something that costs movie studios hundreds of thousands of dollars today. Combine that with the spread of high-definition, widescreen TVs, and the transition to multichannel surround sound and you've got interactive games that are almost cinematic. "We'll make games that can make you cry," says EA President Riccitiello. Cry all the way to the bank, he might add. Just ask John Madden.

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