How Jay Leno’s new show will change the face of TV

American television is about to undergo its biggest shake-up in decades – involving the potential loss of thousands of Hollywood jobs, and the end of prime-time drama as we know it - all because one man, Jay Leno, king of the late-night chat shows, had to be found a new job.

The dilemma of what to do about Leno when his contract expires in May has been dogging the NBC network for years. The 58-year-old comedian known for his heavy jaw, thick gray hair and relentless work ethic, has hosted The Tonight Show, a mix of comedy routines and light-hearted interviews, for 16 years since taking over from Johnny Carson.

In May, under a long-standing arrangement, he hands over the reins of the show, which broadcasts at 11.35 on weeknights, to fellow comedian Conan O'Brien, who currently hosts Late Night with Conan O'Brien, which starts when The Tonight Show finishes, at 12.30 at night.

But Leno is America's late-night ratings leader, consistently beating his arch-rival on CBS, David Letterman, and earning NBC more than $50m a year in profits.

The entire model on which network TV has been based is breaking down

The obvious solution was to keep Leno in the job – but if it did that, NBC would have had to pay O'Brien $40m in compensation. The other option - to let him go – would be madness: he could move to another network, and compete directly against O'Brien.

So, for NBC, the solution, though radical and fraught with danger, seemed like a no-brainer. Keep Jay Leno by offering him a new one-hour show at 10pm – and at the same time save millions of dollars a year on the financing and development of the sort of prime-time drama series traditionally screened at 10pm.

The fact is, NBC – and the other American networks – had a much bigger problem to contend with than the little local difficulty of Jay Leno's contract. The entire economic model on which network television has been based for the last 50 years is breaking down, and fast.

With so much competition from the internet, DVDs and cable television, the traditional network audience is fast disappearing, especially for heavyweight dramas like ER, Law and Order and Heroes which are broadcast at 10pm. And, increasingly, those who are tuning in are tuning out the commercials that pay for everything, by time-shifting on digital video recorders and zapping through the ads. As troubling for the networks is that there have been no new hit shows introduced in the 10pm time-slot for the last four years.

By offering Leno the 10pm slot, NBC could save a fortune. Although he will be paid upwards of $30m a year to host his new Jay Leno Show, starting next September, five nights a week of the show will cost NBC only around $2m – compared with the $15m it costs to make five nights' worth of scripted drama.

"Broadcast television can never be the way that it has been for the last 50 years because of all of the structural changes going on in our industry," says Marc Graboff, co-chairman of NBC Entertainment. "But we are offering something to our advertisers that is more innovative, and it's a topical show, so that makes it somewhat digital-video-recorder-proof."

While this all may make sense for NBC - and the other big networks will be watching to see how audiences respond to the change in the late night landscape - it will have a dire impact on Hollywood, and eventually on TV programming worldwide.

From September there will be five fewer shows a week to write for, direct, star in or do the make-up for. That will destroy the livelihoods of thousands of people. And the ripples will be felt much further afield. What will British television executives do with their schedules once solid American performers like ER and Law and Order are no longer being produced? Give Jonathan Ross a nightly prime-time chat show? But that's another story.