Cover Story: The Content Crunch –

Mailrooms are never easy places to work. Not only must your hands navigate an incessant parcel flow, but your mind must restrain your mouth from shouting at superiority complex-addled colleagues who always insist that their particular chore must be handled ASAP. So take particular pity on the stamp-lickers toiling away at the Federal Communications Commission’s headquarters in Washington D.C. Not only have they spent much of 2003 dealing with their usual tribulations, but they’ve also been burdened by an unprecedented wave of written public comment over FCC rules changes that threaten to make big media even larger.

The last official count was 520,000 letters received as of June 2, although an FCC spokesman predicts that the number will have exceeded 750,000 by the time this article is published. What is more remarkable than the sheer volume of correspondence is its actual content. Conservative estimates put opposition responses to regulatory relaxation at 97%, while the FCC’s two dissenting commissioners (both Democrats) suggested that the figure might actually be closer to 99.9%. In fact, this may have been the only major political issue in recent memory that found both Common Cause and the National Rifle Association lying comfortably in the same legislative bed.

The supportive minority, on the other hand, included usual suspects like News Corp.’s Rupert Murdoch, Viacom’s Sumner Redstone and regulatory representatives for Mickey Mouse. More important were the FCC’s three Republican commissioners, who collectively brushed off the masses by passing the rules changes in a partisan 3-2 vote.

Largely absent from this debate, however, were private equity investors-people who traditionally have played a role in launching new media content endeavors and selling off mature ones. Not even the National Venture Capital Association offered an opinion, despite FCC chief Michael Powell’s recent assertion that venture capitalists would drive the anticipated expansion of viewing, listening and reading options for consumers.

Why the apparent disconnect? Because many private equity investors mistakenly believe that media content investing went away when the dot-com bubble burst. “The anomaly was investing in content during the bubble,” says Stewart Alsop, a general partner in the Menlo Park, Calif., office of New Enterprise Associates who previously worked in senior publishing industry posts. “Investors would be crazy to get back into content.”

But crazy or not, they have returned. As of early June, venture and buyout firms had invested 83% more dollars in media content plays than they did in all of 2002-and were on the cusp of surpassing the 2001 total of $3.39 billion (see chart below). A good chunk of this year’s activity involves either buyout or late-stage venture dollars, but early-stage players also are making a push in emerging markets like digital cable television.

Battery Ventures, for example, recently kicked off what could be a $100 million content investing initiative by participating in a Series A deal for a new high-numbered cable offering called The Tennis Channel. “Content has been and will be king,” says Todd Dagres, a general partner with Battery, which is based in Wellesley, Mass. “We fooled ourselves in the late 1990s by thinking that technology was king, but it was really just an attempted palace coup that got slapped down.”

The private equity industry, then, had millions of good reasons to sit down at the FCC debating table, even if it was only to say that the surrounding hubbub was much ado about nothing. But it stayed home, and will have to live with the consequences unless there is some sort of Congressional intervention by rules change critics like Sens. Barbara Boxer and Trent Lott (again, unlikely bedfellows). The only real questions left are what the consequences of deregulation will be and which side investors should take if they ever get another chance to voice their opinions on media regulation.

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