Hollywood relishes historical revisionism. It not only informs the imagination of its storytellers, but recasts the reputations of its players. Take Michael Ovitz: The überagent known as the most powerful man in Hollywood became a pariah without portfolio after failing as president of the Walt Disney Co. It's not a pretty story, but then these aren't pretty times. Ovitz can expect company.

Before today's moguls join the fallen, however, let's understand why. Let's appreciate the inexorability of their demise before revisionism consigns them to the has-been dustbin. It won't be the character flaws ascribed to Sumner Redstone when, inevitably, he relinquishes control of CBS Corp. and Viacom Inc. It won't be familial infighting behind the breakup of the global media-and-entertainment empire assembled by News Corp. chief Rupert Murdoch. And, regardless of what critics say, it won't be financial engineering that finally catches up with Liberty Media Corp.'s John Malone.

What does them in will be much more pedestrian. It will be you and me and our increasing participation in digital diversions. "It used to be 'Let me entertain you,'" says Blake Warner, a managing director in software, media and telecom investment banking at Thomas Weisel Partners Group Inc. "But now it's 'Let me provide you the tools to customize your entertainment consumption.' "

This rejiggering of consumers' approach to media and entertainment couldn't have more profound consequences. For starters, to participate in the new order at all, content must make itself available in the so-called on-demand environment. "It has to be available when I want it," Warner says, "as opposed to my having to architect my life around any one broadcast I particularly want to see."

Moreover, rather than generate buzz through paid advertising and other one-way blasts of information, content will be increasingly reliant on communications flow. This is a new aspect of social media, which, in turn, is an update of the social network. "MySpace isn't just social networking anymore," Warner says. "Sure, the social-networking content is still there: the pictures of people, their stories and all that self-expression. But now these sites also serve up blogs, pull in news feeds and provide ways for friends to keep up with friends."

How consumers organize their social media determines their communications flow. And the fact that they've been spending more time online than in front of television sets since the summer of 2007 suggests their communications flow is already removed from traditional media. So, too, are the means of monetization. In fact, in terms of compensating content providers, online media is as disorganized as offline media is organized.

This will change with time and experimentation as advertisers pursue audiences online. (That vice-presidential candidate Sarah Palin's interview with Katie Couric of CBS News attracted 4 times as many viewers online as it did on TV has given the pursuit a sense of urgency.) Yet it could take decades, to paraphrase NBC Universal Inc. CEO Jeff Zucker, before the analog dollars commanded by content providers stop being converted into digital pennies.

Make no mistake; those pennies already add up. The Internet Advertising Bureau tallied $21.2 billion in domestic online ad revenue for 2007, third behind $31.2 billion for TV distribution and $48.6 billion for newspapers. But disparate growth rates moved Veronis Suhler Stevenson LLC to predict in August that broadcast TV will surpass newspapers as the largest U.S. ad medium in 2008, only to find itself surpassed by Internet ad spend in 2011.

Online's emergence as an ad platform is siphoning billions of dollars from traditional media and, as a result, upending business models that have enriched not only the moguls atop traditional media but also their many minions and middlemen. As Dennis Miller, a traditional-media veteran before becoming a general partner at Spark Capital a few years ago, puts it: "You can no longer afford to pay disproportionately high wages to executives, agents, and talent -- other than a few proven winners. Costs could be reduced 20% across the board at all major media companies and intermediaries without causing a single disruption. And since they aren't good candidates for a government bailout, they'd better clean their own house first."

These insights are already borne out by wholesale layoffs at Viacom and NBC Universal this month, not to mention cutbacks at newspapers for years. The downsizing will continue, per force, until cost structures at media-and-entertainment companies are as compressed as those in two other sectors undergoing wrenching transformation: automobiles and financial services. Granted, media and entertainment may only have reached a tipping point -- versus flash points for the other two -- but that's because consumers tend to be creatures of habit when it comes to media usage. Bankers who lose their jobs won't even think about buying a car. But they'll still read The Wall Street Journal.

The recession will accelerate this transformation, forcing bankruptcies and restructurings in areas of media and entertainment considered, until recently, inviolate. "Distressed debt and vulture equity are going to be the market's primary drivers for a couple of years," says Miller, who nonetheless remains sufficiently optimistic about the future to regard the imminent shakeout as "a kind of cleansing."

Innovation, meanwhile, will proceed undeterred. That's mostly attributable to the peculiar mindset of entrepreneurs, who continue to dream up and obsess over inventions in every phase of the economic cycle. They'll see to it that Web 2.5 arrives on schedule, regardless of whether the sector it arrives in is still restructuring itself and its balance sheets. "Smaller will be better in this new world," Miller says.

Although Miller believes a couple of traditional-media conglomerates will "effectively morph" into Web 2.5 enterprises -- after all, much of media and entertainment will remain hit-driven, requiring all the resources that hit-making machines need -- he doubts these survivors will like what they see. Barriers to entry will have fallen beyond recognition, while distribution models will have abandoned their historic fixation on protection.

"It's going to be difficult for the DNA of existing media companies to assimilate the very different DNA of media consumers in the future," the venture capitalist says.

Even if the moguls undergo the psychological makeover necessary to compete in a Web 2.5 world, they'll wind up hampered by their own organizations. For these are their creations or their reflections -- that's why they're moguls -- which also makes them Emersonian: "Every great institution is the lengthened shadow of a single man." The forces of nature who cast the lengthened shadows may be nimble enough to change themselves. But that doesn't mean underlings they installed as proxies can do the same. Starting anew seems easier by comparison.

Entertainment academic Neal Gabler, on parsing Ovitz's failure 12 years ago at Disney, attributed the former agent's earlier status as the most powerful man in Hollywood to the breakdown of the studio system. Its demise shifted power to talent and, by extension, its agent. "So long as talent could set the terms," Gabler wrote in The New York Times, "Ovitz was a player."

Another paradigm shift coincided with Ovitz's joining Disney. Gabler called it "merger mania," citing Disney's acquisition of Capital Cities/ABC Inc. and Seagram Co. Ltd.'s taking over MCA Inc. "No matter how much money the stars got, talent was becoming a smaller part of a larger whole. The stakes of the game had risen, with multinational conglomerates owning everything from TV networks to magazines to amusement parks."

Whatever prescience Ovitz had about this shift did him no good. "He apparently assumed that the techniques he had used as an agent and mediator could simply be redeployed in the corporate setting, that the entertainment business was still a people business where swagger and sass were more important than politesse and where a dream was worth a thousand M.B.A.'s," wrote Gabler, who noted Ovitz's comeuppance set off a revisionism Hollywood hadn't experienced since gleefully recasting the reputations of first-wave moguls such as Harry Cohn, Louis B. Mayer and Jack Warner.

The implications of Hollywood's going digital are greater than those of its studio, talent and conglomerate eras combined. A new order is coming, one that takes power away from the conglomerate and puts the consumer in command. And it's coming with such celerity and certainty that Gabler's next mogul installment must surely be close at hand.