BROOKE GLADSTONE: This is On the Media. I'm Brooke Gladstone.

BOB GARFIELD: And I'm Bob Garfield. A little over a year ago, we floated a theoretical chaos scenario. It goes like this. Mainstream media, especially network TV, lose so much audience, they can no longer attract the advertising revenue they need to sustain their content, leading to still more audience defection, then more advertiser defection, and so on into the toilet, all before the online brave new world is ready to take over. In this past year, plenty has happened to add to the chaos. TiVo and DVR usage is rising, with Forrester Research estimating that by 2008, one in four households will be DVR'ing their favorite shows and skipping past commercials. ITunes has started selling hit TV shows for $1.99, and now all the networks are offering free streaming content on their websites. More options for us, and more jeopardy for the old model. I asked Jeff Jarvis, blogger at buzzmachine.com, if we are indeed in the midst of chaos.

JEFF JARVIS: We absolutely are. I mean, you look at just the last few weeks. ABC enraged its own channels of distribution and said, to heck with it, guys. I can't protect you any more, I've got to put our shows on iTunes and on the Internet.

BOB GARFIELD: When the networks decide to distribute their shows over the Internet instead of over the air, where will the money [LAUGHS] come from for them to generate hit programs that anyone wants to see over the Internet or anywhere else?

JEFF JARVIS: What's the definition of hit, Bob? In the future -- you know, small is the new big. Do the big networks need big hits, still? Yes. They're still in a blockbuster economy. But there's going to be a whole huge part of media that doesn't need to be that big. It can be big enough to be successful. It doesn't mean there isn't a lot of money to be made with a big mega-hit, but the risk is ever, ever higher. The big old networks, the big old newspapers, the big old media companies are all shrinking.

BOB GARFIELD: Okay, so is it just going to shrink, is it going to be orderly or, you know, is there going to be blood on the streets here, Jeff?

JEFF JARVIS: Oh, it's chaos, without a doubt. But the problem in America is -- what I hear media executives here say, is they've got to hold onto that old world, whereas in Europe, I hear media executives say, we've got to get past -- into the new world as quickly as we can. Al Rusbridger, the editor of the Guardian, imagines a world without presses. Tom Glocer, the head of Reuters, talks about a world where his consumers are now his editors. The head of Gruner + Jahr says the role of the journalist in the future is to be a moderator. Those are all entirely new ways to look at that. But here in America, what I hear is, how do we save the newspapers, save the newsrooms, save the networks, save the old business models. Well folks, they're gone. Get over it, and move to the future ahead of your audience, because if you wait, you're going to be steamrolled.

BOB GARFIELD: Jeff Jarvis blogs at buzzmachine.com. If you're looking for the pulse of the old network model, a good place to start would be the upfronts. Each year, the networks stage huge spectacles for advertisers to pitch their new fall lineups. Up until a few years ago, networks would sell up to 80 percent of their ad space for the whole season within a few days. This year, the networks could possibly match the nine billion dollars they pulled in last year, but the long trend of annual increases in upfront revenue is almost certain to be over. An intimidating coalition of Wal-Mart, Microsoft and others want to do away with the upfronts altogether in exchange for an auction-like system, and still other big sponsors have given the upfronts a pass. Scott Donaton is the editorial director of Advertising Age, my other employer. He says that networks have traditionally used fear tactics to get advertisers to buy time up front.

SCOTT DONATON: They only have so many 30-second spots available in each show, and the fear that they planted in advertisers was always that if you don't buy this up front, you might come in later and it won't be there, and then how are you going to advertise? How are you going to reach your target? Or, I'm going to charge you a huge premium, up to 50 percent more. It's been a ridiculous fear-based market in which the power rested not with the money, where it should, not with the advertisers who are spending the money, but with the networks who control the inventory.

BOB GARFIELD: Now, considering how precipitously network audiences have dropped off, has that kind of panicked buying subsided? Are the upfronts losing some of their steam?

SCOTT DONATON: It's been clear to anyone with a brain, for the last five to seven years, that the upfront as a process was out of date, out of step with where the marketing mindset was. And finally, this year, more than in any year before, because of the explosion of digital media, advertisers have said, wait a minute, we've got the power here. We've got the budgets. And this is a ridiculous way to do business, and we're just not going to do it that way any more. So this year's upfront hasn't gotten underway in a way that we actually know where it's going to end up yet. But last year's spending was flat, and everybody believes that we've now hit a turning point.

BOB GARFIELD: In fact, several major advertisers are boycotting the whole process –- Johnson & Johnson, Coca-Cola.

SCOTT DONATON: The fact that some advertisers are holding back this year, saying, I'm not going to participate in that any more – the advertisers that have said that, like Johnson & Johnson, aren't big enough yet to change the market on their own, but it's a hugely important symbolic first step. And the minute you have an advertiser with a really significant budget, a General Motors or a Procter & Gamble – these are companies that spend three billion dollars a year in advertising – the minute one of those companies says we're going to sit it out as well, then immediately the power of the networks will be gone, because they won't be able to put that fear in your head that the inventory will be gone, because some of the biggest spenders won't be snatching up all of that inventory.

BOB GARFIELD: So is it too early to tell what actually is going to happen this year?

SCOTT DONATON: It will probably be a little more slow and drawn out and rational than it has been. Some years the upfront has sort of happened in a frenzy of late-night phone calls and frenzied buying, and then it's just done. It's beginning to be a more drawn-out process already. That will definitely happen this year. Whether that ends up meaning that pricing in the end looks flat or is down slightly, I can't say yet, but there's no doubt that we've hit the turning point year, that it's not going to sort of turn around back from this into a more irrational marketplace again.

BOB GARFIELD: Let's just say that this is the year that the networks actually see a drop in the price that they can get per set of viewer eyeballs. Will that not mean that they have fewer dollars to invest in programming and shrinking margins and all the other things that could be the beginning of the end of the whole ecosystem?

SCOTT DONATON: I don't think it's going to be to the level where they can no longer produce quality content, but they're going to have to pick their shots a little more carefully, because I think network television will become and mass media will become more event-driven. It's already beginning to happen, but I think you'll see the Super Bowl and "American Idol" finales and those places where the networks will be able to gather mass audiences. But we are definitely going to see a move away from network television, and those budgets are going to decrease. And that's a reality that the networks have to deal with, regardless of whether they have an upfront process or not. Advertisers are beginning to shift their spending to more targeted media, to the Internet. There will still be an upfront in terms of a point in time where they stop and showcase their wares, but the fall season itself, and the introduction of the fall season, is something that no longer exists to the same event level that it did 10 or 20 years ago. They're introducing new shows all year 'round. Reality shows are coming in and out of the schedule all year 'round, and that shift is permanent and real.

BOB GARFIELD: Scott, thank you very much.

SCOTT DONATON: Thanks, Bob.

BOB GARFIELD: Scott Donaton is the editorial director of AdAge. Estimates say advertisers will spend less than 300 million dollars on the networks' online offerings, not much compared to the 9 billion dollar total. But the networks are paying attention. You can now stream an entire episode of "Lost," or three other shows on ABC's new website, for free. The "Today Show" also can be watched on the Web in a free-streaming format. CBS president Les Moonves said of his network's new online offerings, with this broadband channel, we've essentially bypassed cable. But it's not just cable that's being bypassed by the plethora of new streaming options. Local affiliates presumably lose a viewer every time a show is downloaded from iTunes or streamed for free. Terry Heaton is a media consultant and president of DONATA Communications, which advises many affiliate stations. Terry, welcome to On the Media.

TERRY HEATON: Well, it's a pleasure to be here, Bob.

BOB GARFIELD: I remember a few years back, the automobile manufacturers tried to experiment with selling their cars to consumers directly via the Internet. And the dealerships went crazy, because [LAUGHS] they'd been cut out of the distribution chain that they'd cultivated for, you know, a hundred years. Is that's what's happening here?

TERRY HEATON: Well, I think exactly that's what's happening here. My clients are all local broadcasters, and so I'm very familiar with this. And they don't say a lot publicly about it, but privately they're terribly concerned. I think they view the disruption of the Internet as a threat more than an opportunity.

BOB GARFIELD: Well, briefly describe for me how an affiliate operates and how it makes its money.

TERRY HEATON: Affiliates, in addition to making advertising money, also received, in many cases, pretty substantial compensation from the networks, just to carry the programs. Well, they are paying them no compensation now, and there are a lot of people who suspect that they're going to want money from the local affiliates just to carry their programming. You know, the longer we go into this straight to consumer, the more that becomes an issue. But the network news operations need local affiliates to provide content, so I think local news still has many, many, many decades of legs.

BOB GARFIELD: Affiliates make most of their money from the local news, but most of their air time is network broadcasting. So am I crazy, or if the networks bypass the affiliates for their main product of entertainment programming, what is there left for the affiliates to air, and what happens to their ability to stay in business?

TERRY HEATON: Well, that's the $64,000 question. What's left is anything they can produce themselves. It's just these are public companies. They're margined [LAUGHS] just as slim as it could possibly be. They have cut expenses every conceivable way. It's not just the networks that are squeezing them. It's the bottom line. So there are companies who are considering buying back their stock, and I think you will see companies do that, because that would allow them to be much more flexible. Now, let's remember, too, that cable companies already are devising strategies to move network affiliates off of the channel numbers that they're currently on – channel 2 on channel 348, or channel 5 on channel 186 -and this is going to mean a loss of millions of dollars invested in branding, to say nothing about all the loyalty that goes with that channel number disappearing overnight.

BOB GARFIELD: Let's just say that this transformation that is underway is going to be too much for some local affiliates to handle. If stations start falling away, all of a sudden the networks don't have an affiliate in every major market, doesn't that make the whole system crumble?

TERRY HEATON: Well, I don't know. The only thing I can say for sure is that what we're going to have in 2010 is different than what we have today. You see, when I go to broadcasters and I sit in their board rooms, the first thing I say to them is that revenue isn't your problem. Audience is your problem. Fix the problem. The disruption is the personal media revolution, and the fact that anybody can be a TV station or a radio station or a newspaper now. You know, this is what's happening around us in all media right now. But there still is a demand for local entertainment, local information, and how are you going to do that? And so that's the challenge I pose to broadcasters, is let's pretend we're not a TV station. Let's restructure your company. Let's say instead of being WKRN-TV, you're Young Multimedia of Nashville, and below that, you have various properties, one of which is a television station. That's the only way that these type of people can get their mind around what they have to do.

BOB GARFIELD: Thank you so much for joining us.

TERRY HEATON: Well, I really appreciate it. And, again, it's a pleasure to be here, Bob.

BOB GARFIELD: Terry Heaton is president of DONATA Communications in Nashville, Tennessee.