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Expiring Deals Could Hit Hallmark Hard

Last week, Hallmark Channel warned it could lose a significant number of subscribers if it is unable to reach new contracts with eight distributors, representing about 83% of the network's carriage base, whose deals expire by the end of 2007.

That creates a challenge for Hallmark Channel and Crown Media Holdings Inc., its parent, which also said that it is continuing to explore “strategic alternatives” for the channel.

During a conference call on fourth-quarter earnings last week, Crown Media president David Evans said the company is continuing to meet with potential buyers for Hallmark Channel, as well as exploring options with strategic partners relating to its film library and the overall company's capital structure. In August, Crown Media said it was pursuing “strategic alternatives” for the network.

Last week, Crown also revealed in its 10-K filing that Hallmark Channel has more than a half-dozen affiliation deals that will expire on or before Dec. 31, 2007.

“If we are unable to renew these distribution agreements, we could lose substantial numbers of subscribers,” Crown Media said in its securities filing. “Although we believe we will be able to negotiate new agreements on favorable terms, it is difficult to predict what the level of subscriber fees will be or whether the distributors will request marketing or 'launch' support payments as a condition for renewal.”

And “any significant loss of subscribers, reduction in subscriber fees or obligation to pay launch support or marketing payments” could impact Hallmark Channel's subscriber and ad revenue, Crown Media said in its filing.

Right now, Hallmark is out of contract with Adelphia Communications Corp. Their pact expired Dec. 31. But it has continued to carry the channel.

Once Comcast Corp. and Time Warner Cable complete their purchase of Adelphia, “we expect that the Adelphia systems will then be covered by the terms of the existing Hallmark Channel agreements with Comcast and Time Warner,” Crown Media said in its 10-K.

The network, now in 72.5 million homes, had a proposal on the table last year with EchoStar Communications Corp., in which it would have paid satellite provider Dish Network $4 per subscriber for carriage, Evans said.

But since Hallmark Channel has become big enough to attract advertisers as it is, it pulled that proposal back from Dish. “I would not anticipate that the company would be spending big to gain subscribers,” Evans said.

In the fourth quarter, Crown Media paid $9 million in subscriber-acquisition fees, versus $7.7 million in the prior-year period.