First, the downside: Donny and Marie Osmond could reconstitute their 1970s variety show, make new episodes, and deliver them online. And nobody could stop them.

But there's good news too, at least for some. Pundits and bratty little Web billionaires have long been predicting the demise of the entertainment-industrial complex. Finally, at the dawn of 2008, their predictions have proved correct. Basically, we're talking about a gargantuan realignment, like the fall of Communism, though possibly not as important.

It's one thing when unknown Wisconsin dudes lampoon Darth Vader with Chad Vader spoofs on YouTube. It's more profoundly symbolic when stars such as Radiohead, Madonna, Spike Lee, Trent Reznor, Morgan Freeman, Danny DeVito, and even Larry the Cable Guy join the uprising. Losing faith in the old guard, these celebs are using the internet to distribute their work directly to consumers and experimenting with business models that don't have anything to do with Universal Studios, Viacom, NBC, Warner Bros. Records, or any other media powerhouse. (Read about some of these outbreaks.) No one has made real money yet selling entertainment online, but there is a growing determination to figure it out.

The internet crowd is trying hard to help find a solution. Venture capital funding for startups that offer professionally produced content more than doubled in 2007 to nearly $60 million. New kinds of music and entertainment companies have swarmed onto the digital landscape, among them Blip, Kyte, Ooyala, and Asterpix—firms all apparently named by J.K. Rowling. Next New Networks, started by veterans of MTV and Nickelodeon, funds the production of video shorts and hosts them on its sites, but it also plans to distribute the shows to video services like Joost, social networks like MySpace, and cell-phone video channels. The company's networks include Bride-O-Rama, billed as "the first network to give you real bridal advice from the recently married." Over time, the company intends to assemble a mass-market audience from many small markets and collect a cut of ad revenue from wherever its shows are played. This is syndication, internet style.

Entrepreneurs are testing every business model imaginable. In March, video-search company Blinkx plans to launch Blinkx Broadband TV, which will act something like a cable company, offering multiple channels and delivering images of much higher quality than the typical grainy YouTube clip. Each channel will carry professionally produced niche programming, like yoga or Ukrainian travel. "If we can amass enough of an audience around the globe, we can advertise to it," says Blinkx C.E.O. Suranga Chandratillake. Meanwhile, comedians Jeff Foxworthy and Larry the Cable Guy are making comedy shorts for the just-launched MyBlueCollar.com, one part of the "or Die" network backed by Sequoia Capital, which plans to make money from advertising. (Look for Larry's video titled "Wide Stance." Or maybe don't.) Or consider Asterpix, a startup developing "hypervideos." If viewers click on a box of Pop-Tarts in a video, they'll get hauled off to a Pop-Tarts ad. Many ideas will get funded. Some will work, and some will make dotcom craters as big as Webvan.

Why are more stars jumping aboard now? To give but one example, why would Morgan Freeman take a chance on making movies to sell on the internet through his company ClickStar? "The traditional system is collapsing so fast that artists have to produce content themselves out of self-defense," says Roger McGuinn, the legendary Byrds frontman who was among the first to sell music directly via the Web. Just look at the mess in old media. The Writers Guild of America strike—a fight partly over expected future royalties from the internet—could shut down TV production for a year. TV networks already produce fewer scripted shows. Movie-theater revenue has been relatively flat for five years, forcing studios to tighten their budgets. In music, CD sales continue to fall, yet as recently as the spring of 2007, as EMI executives have told me, they still made up 90 percent of record companies' revenue. If inincome is dropping for labels with no replacement in sight, it's worse for artists, who get only about $1 per disc sold. Many artists now see an opportunity to make more money selling directly through iTunes or their own sites.

Meanwhile, the tech community has created an ecosystem piece by piece that can deliver high-end entertainment in user-friendly ways. Watching an episode of Robot Chicken on Joost can be easier and more convenient than catching the same show on the Cartoon Network. Quincy Smith, who runs CBS Interactive, recently said, "Faced with a choice between watching something on a beautiful plasma-screen television or on a PC, you're going to opt for the plasma-screen television." But that's true only if you're old enough to, well, watch CBS.

The stars haven't come en masse yet for a simple reason: the money. Julia Roberts makes $20 million per movie from the major studios. She'd have to be given some compelling reasons to build a website with a bunch of propeller-heads in Birkenstocks. When Will Ferrell jumps headlong into the Web, he's making a bet that the cash will come—someday. "This is happening in advance of the money," says Jonathan Miller, former C.E.O. of AOL and now a new-media investor. "It will be lucrative in the next phase, as ways to monetize [internet entertainment] mature and these businesses become real. It will be another turn of the wheel when real money starts to flow."

And flow it will, because money always follows the audience. There was a huge question about how Web-based entertainment would be marketed and publicized. But now there are viable candidates: the big social networks, MySpace and Facebook, as well as the smaller, more focused networks popping up through sites like Ning. Songs and videos are recommended and passed around. Some gain momentum. That is how Ferrell's short video "The Landlord" ended up being viewed 50 million times. It was never advertised or promoted in any traditional sense. Social networks are proving to content producers that there is a way to reach TV-network-size audiences on the Web.

One thing is certain: As internet ad networks like Google's get better at tracking video hits, dollars will shift from broadcast media to the more targeted media on the internet—a more efficient means of reaching potential customers. That revenue will attract additional stars to internet media, and they will draw a bigger audience, which will result in increased revenue. "It will quickly get to a point where if you don't do it, everybody else will be doing it," Miller says about developing entertainment for the Web. "If you're not there, where are you? Then you'll see the stars participate."

Record labels, major studios, and TV networks won't disappear, just as movies didn't disappear after the arrival of television. But they will be diminished, much as cable TV sapped the power and challenged the dominance of network TV a couple of decades ago. Certainly, traditional media companies will no longer be the content gatekeepers, which in some cases could be unfortunate. In this new media world, Donny and Marie could foist themselves on us again. There was a good reason their show was canceled. It was so bad that the clips still get hits on YouTube.