Off the Block but Still in Business

Apr 24, 2006  •  Post A Comment

Now that the cloud of uncertainty about a possible sale of the Hallmark Channel has lifted, little is expected to change at the cable network.

That’s the message Hallmark Channel executives gave last week following an announcement that the channel’s parent, Crown Media Holdings, was calling off its nearly eight-month search after it failed to produce a buyer for the channel. Crown said it will continue to run the channel, along with its offshoot, Hallmark Movie Channel.

At first blush the decision not to change course might seem counterintuitive. After all, there is a reason few, if any, serious bidders materialized. Hallmark has a high debt load and a viewership that some potential buyers criticized as skewing older.

Those knocks, however, don’t take into account that the path that Hallmark is currently on is producing significant results.

Indeed, while the network was in the throes of being shopped around, it managed to expand the number of homes able to get the channel, while at the same time posting significant ratings and advertising revenue gains.

Hallmark is currently available in 72.5 million homes, up from 67.7 million at the end of the 2005 first quarter and 70.7 million at the end of the 2005 fourth quarter. Advertising revenue in the fourth quarter, the most recent period for which financial data are available, shot up 28 percent to $40.6 million from a year earlier, and internal projections are the channel will do $170 million in ad revenue for 2006. Affiliate-fee revenue, though still small due to deals the network struck in order to gain carriage, jumped 108 percent in the quarter to $5.4 million.

In terms of ratings, Hallmark is also making significant strides. It ranked 16th among all ad-supported cable networks in total day for the 2006 first quarter, according to Nielsen Media Research, fueled by sharp growth in the coveted demographics of adults 18 to 49 and 18 to 34.

It also helps that Hallmark’s programming is considered family-friendly, a boon at a time when regulators in Washington are fretting over what younger viewers are accessing on their TV sets.

“We’ve never lost our momentum,” said Paul FitzPatrick, executive VP and chief operating officer of Hallmark Channel. “We never lost focus and we continued to deliver.”

Challenges Remain

But that doesn’t mean challenges don’t exist. Wall Street analyst Dennis McAlpine of McAlpine & Associates pointed that the channel’s debt load-which stands at around $900 million-remains a hurdle.

As an independent channel, Hallmark isn’t able to leverage its ties to other channels in order to remain on a system, which means the channel will have to work harder to stay on a system if a cable operator begins reconsidering carriage of Hallmark-something that looms in the minds of executives at many independent channels. The network has a number of contracts coming up for negotiation over the next 18 to 20 months, and Mr. FitzPatrick believes the negotiations, while complex, will produce win-win deals for the channel and the cable operators.

Another challenge: being able to charge advertising rates that are commensurate with its ratings and its reach. Plus, there is the issue of the age of the typical Hallmark Channel viewer. While most viewers tend to be in the 25 to 54 range, company executives admit more viewers tend to be at the older end of that range than in the middle.

Addressing the older skewing audience is a top, though tricky, priority for the channel. David Kenin, Hallmark’s executive VP of programming, said that it takes more than simply casting a crop of hot, young actors to do the trick.

“Sometimes we can put on an older star and get a young response if it’s the right subject matter,” he said, pointing to “Murder 101,” starring octogenarian Dick Van Dyke.

Mr. Kenin said Hallmark began in late November ramping up the number of younger-skewing movies it runs, which he believes helped contribute to ratings gains seen in the first quarter. He may tweak that strategy further next year, he said.

If Mr. Kenin is successful, that will help William Abbott, executive VP of advertising sales, in his efforts to boost CPMs, which he said are in need of a “correction.”

“We are significantly undervalued in the market, but over the next two, three, four years, if we deliver tremendous value, we will see a reward for that.”