Kyndra and Cami are kind of fake—and not just in the catty teenage sense of the word. The two girls by the pool are computerized 3-D replicas of the cast members, who are using mouse and keyboard to navigate their avatars through a multiplayer online environment known as Virtual Laguna Beach. Anyone with a PC and a broadband connection can join them.

MTV planted its flag on the moon on August 1, 1981, and the channel quickly came to define what being young and hip was all about. The quick-cut style of the music video set the pace of the era and helped launch the careers of directors like Spike Jonze and Michel Gondry. In addition to being the official soundtrack of youth culture, the network discovered up-and-coming talent like animator Mike Judge, pioneered reality television with The Real World, and, with its televised town halls, helped send Bill Clinton to the White House in 1992.

But as anyone will tell you, MTV has lost its groove. The network’s 2006 Video Music Awards were the lowest rated in 10 years. Its airtime is increasingly occupied by reality shows. You can find music on offshoot MTV2, but even so, TV commercials break more new bands these days. As an arbiter of cool, MTV has lost its clout.

MTV has always struggled to stay hip. “The novelty of music video wore off a year or two into our history,” says Van Toffler, president of MTV Networks’ music group. But over the last decade, the network has had an especially hard time keeping on top of the latest trends. Why? The Internet killed the video star. Since the advent of Napster, MP3 blogs, and YouTube, kids have learned about new music by going online. They watch, buy, stream, swap, and steal music online. They list their favorite tracks and debate which band is coolest online.

Now MTV execs are scrambling to catch up with the hot new hangout spots on the Web. The network’s parent company, Viacom, had a chance to buy MySpace, but competitor News Corp. snapped it up for $580 million in 2005. (A corporate reshuffle at Viacom followed.) MTV has been reduced to copycat initiatives. Last May, MTV beta-launched the subscription-based music-download service Urge to compete with Apple’s iTunes. It continues to beef up Overdrive, a broadband site offering free music videos and show outtakes that vainly tries to compete with YouTube. The shows also have discussion forums-—but they aren’t holding on to as many eyeballs as the network would like. “Kids were watching Laguna Beach,” says Matt Bostwick, an MTV senior vice president, “but then they were going everyplace else on the Web to talk about what they’d just seen.”

These overhyped, underperforming MTV.com portals may, however, soon be overshadowed by a tiny unit within the network called Leapfrog. Its mission: Don’t try to compete directly with today’s top destinations. Instead, find the next big thing so MTV can, yes, leapfrog the competition once social networking sites start to seem so five minutes ago.

Bostwick, 48, is a leader of the Leapfrog initiative. The veteran marketing exec commutes from suburban Connecticut to his Dilbert-drab office in midtown Manhattan, but he’s also a gamer who dresses like Johnny Cash: ankle-high black motorcycle boots, black jeans, and black shirt with black stripes. He’s betting that 3-D environments like Virtual Laguna Beach are the next logical step beyond what he calls the classical model of 2-D social networking sites.

And he’s probably right. What YouTube and MySpace offer—the ability to actively participate, build a social network, and express yourself by adding your own content—is now a minimum requirement for any Web-based property that wants to capture youth. And virtual worlds like Second Life push this sort of online socializing a step further. There, your interactions unfold in real time and take the form of a 3-D avatar that is more expressive than any flat Web site could ever be.

With its headlong leap into virtual worlds, MTV hopes to forge MySpace 2.0—and find its way back to the cutting edge. “It’s like the moment you went from listening to music to watching it,” Bostwick says. “Now we’re taking it from watching the show to actually becoming the show.”

Bostwick is showing me his maroon Cadillac convertible. “It’s not really made for this kind of driving,” he says. He pushes the up arrow on his keyboard to make the Caddy go forward, but it stalls out and slides down the heavily banked curve of a virtual rally course. Bostwick has traded in his all-black wardrobe for a flattering micro-miniskirt—a fetching choice on the female avatar he chose for the purposes of this test-drive. When he pulls the Caddy over, it attracts the attention of a guy in board shorts and a hoodie who jumps into the passenger seat beside the newly buxom Bostwick. The MTV exec ejects his suitor with a mouseclick. “Everybody wants one of these,” he says, grinning.

Bostwick has been mixing mediums in his marketing for a while.