The media world ushered in the new millennium with a great flourish. Just 10 days into 2000, America Online Inc. (AOL) announced it would buy Time Warner Inc. (TWX), creating a partnership between new and old media on an unrivaled scale. At the time, Internet companies were still highly valued, and old-line media companies were looking for deals to ensure their survival. And what better way to help promote Time Warner's sprawling assets--from Bugs Bunny and Time magazine to HBO's The Sopranos and CNN's Crossfire--than through an Internet service that reaches 25 million-plus subscribers?

Since then, the New Economy has been knocked down a notch--even as "convergence" races forward. The deal between AOL and Time Warner finally got approval from the Federal Trade Commission in December, after the company agreed to open its services to competitors. And while success is still uncertain, the logic behind the merger is guiding a restructuring of the whole media industry.

A slew of blockbuster media deals has been set in motion, all with a common goal: to control and leverage as many news and entertainment channels as possible. All told, media deals worth more than $261 billion were announced in 2000--up 12% from 1999, according to Thomson Financial Securities Data. While there were fewer deals than in 1999, they were larger, further tilting the landscape to a handful of outsized players. Among the highlights: French water and wireless company Vivendi (VVDIY) bought Seagram Co. (VO) to get its Universal movie and music operations. Newspaper publisher and TV station owner Tribune Co. (TRB) bought Times Mirror Co. (TMMR) And Viacom (VIA.B) closed its purchase of CBS (CBS)--and bought the remaining part of radio giant Infinity Broadcasting Corp. (INF) that it didn't already own. While the field will continue to narrow in 2001, analysts expect to see at least a few more megadeals in the coming months.

HARD PART. The challenge now is to realize the promise of these mergers. It won't be easy. The sheer scale of the deals may prove unwieldy. What looks good on paper can turn into an organizational nightmare, especially if old and new media cultures clash. "2001 is the year of execution," says Edward T. Hatch, a media analyst at SG Cowen Securities Corp. Adds Viacom President and Chief Operating Officer Mel Karmazin: "Buying these businesses is easy. Running them is the hard part."

Complicating matters is an expected downturn in advertising, the lifeblood of most media companies. After a record year, ad revenue growth is expected to plummet in 2001 to about 6%, from nearly 10% in 2000, according to media buying firm Universal McCann. Television networks will be especially hard hit now that the dot-com boom has gone bust and the elections are finally over. Reduced revenues won't help matters on Wall Street either. Investors shunned media companies in 2000; on average, their stocks are down about 20% for the year.

Still another blow to the bottom line may arrive in the form of strikes later this year by both the Writers Guild and Screen Actors Guild. Such walkouts would affect companies with either film-production or television properties. On the bright side, a protracted strike and a nation weary of reruns could spell a real opportunity for nonunion cable broadcasters such as Discovery and Home & Garden Television to build up their viewer bases.

Meanwhile, turf wars will rage as satellite companies lure away cable subscribers with the promise of more channels and a clearer picture. Media investment banking firm Veronis Suhler projects that the satellite camp will grow by 12.3%, to 13.8 million subscribers, an increase of about 1.7 million. The cable camp, in contrast, will grow to 68.5 million, a 1.3% hike representing 700,000 new users, the company predicts.

All of this is part of the race to convergence. But the pipes and distribution have to be in place to sell the product--programming. And while the promise of interactive entertainment has yet to be realized, media companies are betting on its ultimate success. Even broadcast networks have a role to play, insofar as they now control precious spectrum for digital broadcasting. So far, high equipment costs and technical glitches have stymied digital television. But consumer electronics companies that make the gear hope to address these issues in the coming 12 months.

Until digital convergence truly comes of age, media properties can still be used in a game of cross-leveraging. For example, after the announcement of the AOL-Time Warner deal, Time Inc. began selling subscriptions for its numerous magazines on AOL. In five months, 500,000 subscriptions had been sold. Likewise, Viacom has been quick to exploit its cache of media properties. Its CBS Sports channel rebroadcasts boxing matches that are originally shown on its Showtime premium cable service. Nickelodeon, another Viacom unit, supplies CBS with its Saturday morning lineup. And the MTV Networks unit is providing material for the ever popular Super Bowl halftime show this year, which will be broadcast on corporate crown jewel CBS.

Not only are there synergies to be mined on the production side, but on the ad side as well. Programming across several media channels can be bundled and sold as packages to advertisers. Viacom boasts that the company's octopus-like reach extends "from [radio host] Don Imus at breakfast to Letterman before bed and everything in between: on the Web, on cable, on broadcast TV, on radio, on buses, and billboards."

HIGH HURDLES. Media companies are also looking to extend their reach through broadcast outlets. Under George W. Bush, many hope regulations will be eased--particularly Federal Communications Commission rules limiting the number of TV stations one company can operate in a market. Expect, also, to see a push for less stringent antitrust reviews in reaction to the hurdles AOL and Time Warner had to clear.

While 2001 may not equal last year's overheated pace, there are still big deals to be made. General Motors Corp.'s Hughes Electronics Corp. (GMH) is the most closely watched for its satellite business, DirecTV. One likely bidder is News Corp.'s (NWS) Rupert Murdoch, who could use DirecTV to build a U.S. satellite presence under a planned worldwide satellite unit. But Viacom, Comcast (CMCSA), and General Electric (GE) are possible bidders, too. Cablevision's (CVC) Rainbow Media Holdings Inc., which operates cable channels American Movie Classics, Bravo, and the Independent Film Channel, is also attracting interest. These assets might fit well with Viacom, NBC, movie studio MGM, or Barry Diller's USA Networks (USAI).

Speaking of Diller, some people expect the mogul to make a run at GE's NBC, especially now that he's cash rich from the recent $1.1 billion sale of several television stations. John F. Welch Jr.'s heir, Jeffrey R. Immelt, has said NBC isn't for sale--but he may get an offer he can't refuse. A broadcast network is alluring to any number of the emerging media juggernauts.

But at least in the short term, it's AOL-Time Warner that will steal the show. While forced, as terms of the merger, to open up its high-speed pipes to competitors and concede some of its monolithic clout, the mega-company is still positioned to generate mega-revenues.

As if there weren't enough subplots for 2001, here's one more: Big music companies have to deal with Bertelsmann's plans to turn Napster into a paid-subscriber service. Last year, millions of kids helped themselves to free music using file-sharing technology developed by Napster founder Shawn Fanning. While Bertelsmann ponders how to make money from Napster, other media executives must be wondering when the next Shawn Fanning will unleash some new scheme to turn their businesses upside down.

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