(FORTUNE Magazine) – If you didn't know better, chances are you wouldn't peg Britain--for years the land of the BBC and, let's face it, not much else--as one of the world's most exciting places to watch television. It wasn't. At least not until Rupert Murdoch came along. Thanks to Murdoch's British Sky Broadcasting, or BSkyB, a couch potato in London with a satellite dish on his roof can place an onscreen bet on a soccer game from an account maintained by Sky Television. Once the game begins, he can alternate camera angles to stay focused on his team. He even can switch off the sound on Sky's neutral sportscasters and listen instead to the FanZone, where a fellow partisan cheers and boos alongside him.

Those aren't puffed-up promotional gimmicks from a village-sized test market. They are features available to 7.4 million BSkyB customers today. When Murdoch was spending billions launching BSkyB, everyone thought interactivity was, well, so much pie in the sky. Now it's a big deal in Britain and a major reason Sky owns nearly 70% of the pay-TV market there.

Murdoch is hoping to replicate the success of BSkyB in Britain on a much larger stage: the U.S. It's been almost a year since Murdoch's News Corp. took control of DirecTV from General Motors, whose Hughes Electronics unit had spawned the satellite broadcaster. Since the entertainment guys took over from the car guys, DirecTV has blasted off.

It's the cable guys, however, who are really sweating. DirecTV has added about 1.4 million customers so far this year--gains taken directly out of the hide of the cable industry, whose combined customer rolls have shrunk by more than 600,000. The battle promises to get fiercer. One of the satellite industry's biggest advantages is that the cable providers have yet to complete upgrading to digital technology. Some 40 million U.S. cable customers still don't have digital systems. Satellite, by definition, is digital. (EchoStar, the other major satellite player, is enjoying a huge growth spurt this year as well, though not as big as DirecTV's.) That means that cable companies can offer digital products, like electronic program guides and video-on-demand, only where they have upgraded their systems.

For their part, cable executives insist they're not worried. They believe their technology--once they do get it rolled out--is vastly superior (more on that debate later). And they have little interest in copying another key Murdoch strategy: sacrificing profits in the short term to win customers for the long run.

Meanwhile, DirecTV is moving fast. Under veteran News Corp. strategist Chase Carey, now DirecTV's CEO, the company has sold off parts that no longer fit, settled long-simmering disputes, and committed billions of dollars of fresh capital. DirecTV is launching new satellites so that it can offer high-definition signals throughout the country. It's planning interactive television features exactly like BSkyB's--and a few of its own. DirecTV is slicing and dicing the programming it buys to create a fresh experience for its users. In short, it is remaking what was a technology-heavy conglomerate into a media company, just like the rest of News Corp. It isn't, after all, a particular broadcast technology that wins hearts and wallets, says Carey. "At the end of the day," he says, "people buy DirecTV because they care about great television."

Murdoch cares deeply about television, of course, but he hasn't yet laid out all the ways he intends to leverage DirecTV. The tidying up of the company, veteran Murdoch watchers believe, is prelude to the real show: positioning DirecTV as a home for the next wave of cable channels--including reality television, sports, weather, and business--that Murdoch is hatching. "The real Rupert," says one media industry bigwig, "hasn't even shown up yet."

It's possible, however, to see where Murdoch is going. Visits to three of his major centers of operation--New York, London, and Los Angeles--provide a picture of Murdoch's game plan for DirecTV. He stays focused on news and entertainment while his cable TV competitors, some of whom are also developing content, chase new revenues in telephone and high-speed Internet services. He embraces the latest in technology if there's even a hint that customers will use it. And as the cable guys point out, Murdoch isn't above acquiring a few of those customers at the expense of profits. "This is all part of his global eyeball strategy," says Aryeh Bourkoff, a debt and equity analyst with UBS. "It's a luxury not a lot of other companies have. It's almost as if they have carte blanche to get the customer."

In the starkly modernist executive-suite reception area of News Corp.'s midtown Manhattan headquarters, a giant flat-screen television is tuned to the company's Fox News Channel. Come to think of it, there don't seem to be any TVs in the building that aren't showing Fox. Nearby, in Chase Carey's temporary digs--he shuttles between New York City, where Murdoch's office is around the corner, and Los Angeles, where DirecTV is based--there's a little globe hanging from a wooden frame on a white marble coffee table. The globe recalls Carey's doomed assignment as CEO of Sky Global, a planned merger of Murdoch's worldwide satellite interests that cratered with the market downturn of 2000.

The takeover of Hughes put Carey back in business, and one of his first actions as CEO was to change the company's name to DirecTV and begin dismantling everything about it that didn't have to do with satellite broadcasting. He got rid of about half the DirecTV corporate staff. He installed Mitchell Stern, formerly head of Fox's TV station division, as president of DirecTV's U.S. operations, which will account for about 86% of its $11.4 billion in revenue this year. (The company also operates DirecTV Latin America.) Carey sold DirecTV's 80% stake in satellite-launch service PanAmSat to KKR for $2.6 billion. He offloaded DirecTV's set-top-box manufacturing division to Thomson. He dumped the company's holdings in XM Satellite Radio for a pretax gain of $387 million. Then he spent $1.4 billion to buy out Pegasus Communications and the National Rural Telecommunications Cooperative, rural satellite companies whose 1.4 million customers DirecTV served but didn't control. "This was a year of transformation," says Carey, 51, who sports a handlebar mustache he's fond of stroking during negotiations. "We wanted to enter 2005 with an array of things being done."

While Carey was addressing DirecTV's structure, Stern was getting its U.S. operation into what he calls "fighting shape." Stern, 50, is a pale, buttoned-down executive with large black glasses and a dry but wicked sense of humor. Having run Fox's immensely profitable TV stations group, he knew a lot about acquisitions and the TV business--and next to nothing about satellites. "My whole life up to this point was dedicated to holding back the future," he deadpans. The TV stations "were successful, but there were all these competitors on the horizon, like satellite. So I went from being old media to as new media as you get."

Stern embraced the new assignment with some old-media marketing. DirecTV dropped the price of its popular digital video recorder, or DVR, a box that is part satellite receiver, part TiVo. It launched a promotion that would give new customers a DirecTV set-top box in three rooms free for signing a one-year contract. And it lined up deals to work with telephone companies, including Verizon, BellSouth, and Qwest, to market DirecTV.

Whether DirecTV is spending too much to get its customers and how long it can keep them are potential stumbling blocks for the new team. According to UBS analyst Bourkoff, DirecTV spent $670 to acquire and keep each new customer in 2002. That number ballooned to $758 last year and will hit $894, he estimates, in 2004. Not surprisingly, DirecTV's bottom line has been hurt in the process. Operating profits for the U.S. unit fell from $459 million last year to a projected $54 million this year, according to Lehman Brothers projections. More alarmingly, the company can't be certain the new customers will stick around. DirecTV's churn--a measurement of the number of customers who leave each month--rose to 1.7% in the third quarter, compared with overall monthly churn in 2003 of 1.5%. The fear is that customers who get sweetheart deals to join will show the least loyalty when they see a better offer.

Investors largely have stuck with DirecTV so far. Its stock, hovering between $16 and $17 for months, has outperformed peers like Comcast and EchoStar all year. But the growth-over-profits mantra is a sensitive topic at the top. "We have an opportunity to take significant market share, and certainly that is something that we're very aggressively pursuing," says Carey, after repeatedly stressing that he's watching the bottom line too.

Rupert Murdoch, however, is famous for ignoring the bottom line, especially when sports are part of the equation. BSkyB built its franchise in Britain by buying stakes in major soccer teams and the exclusive rights to broadcast their games. Fox Television similarly bet the company on broadcasting NFL football games, a loss leader that kickstarted the network in the 1990s. Carey continued that tradition at DirecTV in November by agreeing to a five-year, $3.5 billion deal with the NFL to continue DirecTV's Sunday Ticket offer, which gives subscribers virtually every game in the NFL each Sunday. The deal was critical because DirecTV's exclusivity was set to expire after the 2005 season, meaning that cable companies could have negotiated their own deals with the NFL. (The two biggest cable companies are Comcast and Time Warner Cable, which is 80% owned by Time Warner, parent of FORTUNE's publisher.) Carey acknowledges that while the Sunday Ticket isn't a profit center--it will bring in revenues this year of $385 million, compared with annual programming costs of $400 million, and rising fast--it was critical to keep a similar deal out of cable's hands. Sunday Ticket also is crucial because it's the kind of cutting-edge product DirecTV can use to show off interactivity across its system. In short, football is the first hint of how DirecTV is following the Murdoch playbook--the one invented at BSkyB in London.

It's 7 P.M. in London, the day after the U.S. presidential election, and back in Boston, John Kerry is delivering his mid-afternoon concession speech. I know that because precisely one of the 75 monitors in the Sky Sports "enhanced control room" is tuned to Kerry. Every other monitor in this windowless room at BSkyB's sprawling campus near Heathrow Airport is focused on one of eight soccer pitches across Europe, where weekly Champions League matches will begin in 45 minutes. The Champions League, a big deal in Europe, pits the best domestic-league teams, such as England's Manchester United and Spain's Real Madrid, against each other over successive weeks, leading up to a European championship. It's like the NFL playoffs with a dose of nationalism.

The catch for fans is that the games are played simultaneously. Using satellite technology, Sky Sports makes an opportunity out of what had been a limitation. At 7:30 P.M., 15 minutes before kickoff, a BSkyB viewer can tune to a channel that displays eight live screens, each showing players in eight stadiums across Europe running onto their fields. The viewer can push a button to select which game to watch (or he can watch all eight on one screen if he likes). Hit another button and real-time stats on the teams and players pop up, thanks to technicians in the control room.

The interactivity goes beyond sports. BSkyB first rolled out interactivity in 1999, and today 60% of its customers use some interactive feature at least once a month. By pushing the red button on their remotes, Sky customers can place bets, using Sky or another bookmaker. They can also call up the latest headlines while watching a news program. Hard-core news junkies can watch eight news programs simultaneously and see which network is doing what. Kids watching a cartoon can flick into an onscreen game like Dora the Explorer. Bigger kids can play videogames against each other within the Sky system. In all, it makes watching television feel a bit like surfing the web, but with live action and easier navigation.

What's impressive about what Sky has done is that in some ways satellite technology is inferior to cable's. "A lot of commentary focuses on the television business in terms of different kinds of transmission technology," says BSkyB's CEO, James Murdoch, Rupert's 32-year-old younger son, a brainy and slightly hyper Harvard drop-out. "What's happened here is that we've taken a product that is pretty much bread-and-butter digital satellite broadcasting technology and really, really pushed it." For example, when a viewer switches to an alternative camera angle for a sporting event, what he's really doing is switching channels; Sky broadcasts the same game on multiple stations. It's a technological trick, but a simple one. When the same viewer uses the remote to place a bid or take a poll (sample: "Prince Charles--is he out of touch?"), the system transmits the input to Sky's database using a plain old phone line, working around the fact that unlike digital cable, satellite isn't a two-way technology.

To date, BSkyB employs interactive TV mostly as a viewing enhancement rather than a sales tool. That could change. Sky has experimented, for example, with interactive advertising, letting viewers order brochures for products they see onscreen. "It's really only the beginning in terms of the kinds of things we can do," says James Murdoch, who was CEO of News Corp.'s Hong Kong--based Star TV for four years and whose 33-year-old brother, Lachlan, is deputy chief operating officer of News Corp. and publisher of the New York Post. Their father, News Corp.'s CEO, declined to be interviewed for this article. He was busy crafting a poison pill for News Corp. after his longtime investing partner, John Malone, surprised him by increasing his stake in the company, seeming to raise the possibility of a fight for control of the empire Murdoch intends to leave to his sons.

BSkyB also illustrates the high threshold for fiscal pain of the elder Murdoch, who at 73 years old is chairman of BSkyB as well as DirecTV. Sky, which is 35%-owned by News Corp., invested two billion pounds over five years to upgrade its customers to interactive-capable set-top boxes. That produced losses of more than two billion pounds from 2000 to 2002. Today Sky is a cash-generating machine, producing operating profits of 190 million pounds in its most recent quarter.

Comparisons between BSkyB and DirecTV are only so helpful, though. Pay TV in Britain is still a growing business, with total penetration around 43% of TV homes, while in the U.S. it is assumed most customers who want either satellite or cable already have it. That means that in the U.S. cable and satellite essentially are fighting for each other's customers. DirecTV hopes that borrowing some of BSkyB's customer-pleasing tactics could give it a leg up.

Halfway around the world from Sky, in Los Angeles, DirecTV is building a television control room of its own. Until now the broadcaster had no use for such a facility. Before, DirecTV merely bought programs from others and zapped them to its users. Football is changing that. Today DirecTV sends two-minute highlight clips of every NFL game each Sunday evening to its Sunday Ticket subscribers who have DVRs. (Almost two million DirecTV subscribers pay extra for the football package; about 1.3 million customers have DVRs.) Currently the NFL is producing the highlights, but in the future DirecTV will be able to put together all sorts of packages of its own as a kind of bonus for users.

The highlight films are satellite television's answer to cable TV's hoped for boom from video-on-demand (see "Comcast Wants to Change the World ... But Can It Learn to Answer the Phone?" on fortune.com). Though it can't offer true video-on-demand, DirecTV hopes to come close by beaming the most popular shows to viewers' DVRs so that they can play them anytime. By compiling montages based on customer requests (an idea: the most interesting two minutes from each of the Sunday morning talk shows), DirecTV could make intelligent guesses. "I think putting the things that 95% of the people want at the push of a button is the best solution," says Carey.

Another goal is to create something cable either can't or doesn't offer. Starting next season DirecTV's NFL package will include a live red-zone channel that will hop around the league on Sunday afternoon showing only games where a team is threatening to score. (Constant adrenaline rush, not to mention the information fantasy-league players most need to know.) Real-time statistics updates at the viewer's command are a natural. DirecTV also will add viewer-selected camera angles and replays, just like those available on Sky Sports. Says Stern: "For us it's about how they watch, not just what they watch." DirecTV will also add what it calls mosaics, like Sky's multiple screens in Britain.

The competition promises to get hotter as the lines blur among cable, satellite, and their telephone partners. Several of the major phone companies, including DirecTV partner Verizon and EchoStar's partner SBC, have announced multibillion-dollar projects to offer video service to their customers via fiber-optic cables they intend to string directly into homes. They are audacious plans certain to benefit consumers because all the camps will be forced to compete on price.

In the U.S. as in Britain, Murdoch's team says it'll stick to its knitting. "We've been helped by the fact that we are very focused on the television experience," says Carey. The cable companies "are fighting the broadband battle and a telephony battle. And those business are much more commoditized than television." On the other hand, cable finally is catching up by rolling out digital services to large numbers of customers, suggesting that the satellite industry's growth could slow. "They're running out of weak people to pick off," says Josh Bernoff, an analyst with Forrester Research. "I've predicted satellite would level off, and it's been wrong. But it's going to be right eventually."

For its part, the cable industry has watched DirecTV's growth with interest--and a fair amount of skepticism. "It's fairly clear that DirecTV has been willing to take profits down to gain customers," says the CEO of one of the major cable companies. "What we don't know yet is exactly where News Corp. is going with this."

That's another way of saying, What's Rupert got up his sleeve? and it's a question on an entire industry's mind, including the executives who know the answer. "Murdoch makes a big point of telling everybody, 'Look how great we're doing, and we haven't done anything yet,' " says Stern. "And I say, 'Well, it sure feels like we've done something. I'm too tired to have done nothing.' But what he basically means is that the kind of things you would dream up--the marriage of content and distribution with Fox and DirecTV--that hasn't been done yet."

Some things can't legally be done. When News Corp. took control of DirecTV, it signed a consent decree with the Federal Communications Commission that promised that any programming its units offered DirecTV have to be offered to competitors as well on a comparable basis. But the biggest hurdle in starting a channel is getting on a distribution platform, and in that, DirecTV gives Fox a boost. And there's nothing to stop DirecTV and Fox Sports, for example, from cooperating on programs that while available to all takers are best viewed on DirecTV. (Media conglomerates both compete and cooperate in many large and some extremely small ways. The author of this article, for instance, is a frequent contributor to business news programming on Fox News.)

When you stop and think about it, that Rupert Murdoch is even in a position to meld his disparate satellite and media properties is one of the greatest stories ever of corporate persistence. His first stab at the U.S. satellite market was a failed venture in the early 1980s called Skyband. Botched or abandoned projects that followed included Sky Cable, an early-1990s partnership among News Corp., NBC, CableVision, and Hughes, which the latter developed into DirecTV; ASkyB, a mid-1990s partnership with MCI that never flew; a called-off merger between ASkyB and EchoStar in 1997; and the stillborn Sky Global in 2000. It wasn't until Murdoch's own lobbying in Washington helped kill an EchoStar-Hughes merger on antitrust grounds in 2002 that News Corp. was able to pay $6.6 billion last December for a 34%, and controlling, stake in what's now DirecTV.

And so Murdoch at last has the key piece of the global media empire he will one day bequeath to his sons. Unless, that is, a succession battle breaks out after all. Either way, it will be fun to watch--possibly on six screens at once.