(FORTUNE Magazine) – Among all the recent surprises from Viacom--Mel Karmazin's abrupt resignation, the departure of Paramount studio chief Jonathan Dolgen, and the announcement of the CEO bake-off between MTV's Tom Freston and CBS's Leslie Moonves--the most significant is that Sumner Redstone has finally and against all odds agreed to step down as CEO.

Until now the 81-year-old Redstone had stubbornly refused to set a date for his retirement. No one can force him out, because he controls 71% of the shareholder votes at $27-billion-a-year Viacom. But months of gentle pressure from Viacom's directors and trusted aides and his wife, Paula, ultimately persuaded Redstone to declare that he will leave within three years. "Sumner is as sharp as ever, but physically he's slowed down," says an insider. It was Redstone's decision to begin formal succession planning that set off the shakeup that followed.

When Karmazin, the former CBS chief, realized he had to compete for the CEO job, he resigned. That delighted Redstone. He wanted to select his own successor, and he felt that Karmazin had been thrust on him by Viacom's 2000 merger with CBS. Worse, Karmazin had no inclination to suck up to Redstone over the long working dinners the boss enjoys. "I don't want to spend my evenings watching Sumner spill soup on his tie," Karmazin once griped.

Karmazin's exit sets up an uneasy game of survivor between two well-regarded colleagues: Freston, 58, a laid-back cable guy with spiky hair, and Moonves, 54, a slick, hard-charging Hollywood programmer. While predicting what Redstone will do is a risky game, insiders say Freston has an edge as the dance begins. He has a longer relationship with Redstone and global experience. And he seems almost universally liked, a rarity in the entertainment industry, where backbiting is common.

Both CEO candidates come from unlikely beginnings. Thirty years ago Freston was living in Afghanistan, manufacturing peasant dresses and exporting them to the U.S. Moonves spent a chunk of the 1970s in Greenwich Village, working as a stage actor and supporting himself by tending bar.

Those experiences shaped both men. "Wheeling and dealing in central Asia," says Freston, "was a tremendous confidence builder, in the sense that you can bring order to what seemed to be complete chaos and disorganization." It left with him a global outlook and an excitement about diverse cultures, both of which have helped the MTV networks thrive here and abroad. If there are doubts about Freston, they have to do with his lack of conventional ambition. "I went out of my way for years to avoid having what we called a grownup job," he admits. Now he says he's fascinated by the challenge of overseeing Paramount movies, Simon & Schuster, Showtime, and BET, along with the MTV cable unit, which includes MTV, Nickelodeon, VH-1, and Comedy Central. Movies will be a major focus for him: "That's the place for me with the steepest learning curve and the biggest economic consequences, up or down," he says.

Moonves, meanwhile, went on to produce plays and TV shows, run the Warner Bros. TV studio, and lead an impressive turnaround at CBS. His acting experience gave him a knack for casting stars, a gift for handling talent, and an ability to distinguish between good and bad scripts--skills that have made him the top programmer in broadcasting. No one questions his ambition; he has expanded his domain from prime time to include CBS News, CBS Sports, TV stations, syndication, and now Viacom's big Infinity radio and billboard operations. Like Redstone, Moonves says content is king: "You put on good shows. The money will follow. And not the other way around."

Some have speculated that a third, dark-horse candidate for the CEO job is Redstone's daughter, Shari. No way, Redstone says. Nor will he stay on beyond 2007. In the meantime Freston will have every incentive to fix Paramount's movie operations, and Moonves will turn up the heat to drive radio growth. Once he's picked a new CEO--and perhaps lost another talented operating head--Redstone plans to remain a "very active" chairman. In other words, Freston and Moonves had best remember who's still in charge.

--Marc Gunther