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Hallmark gets serious

Paying one of cable's richest per-sub fees to upgrade its DirecTV carriage, the Hallmark Channel signaled to MSOs that it has more to offer than just family-friendly programming.

Hallmark is shelling out about $11 per subscriber to add about 7 million DirecTV subs, and the relaunched net is on the prowl for more carriage deals.

"I don't think anyone in the industry has seen that before," one cable insider remarked of the launch fee.

It's far more than the usual $5 per subscriber fee, and MSOs are interested.

"The deal makes them much more attractive to cable operators and to national advertisers," said one cable executive whose system only partially carries the former Odyssey network. "They need to get distribution before they can sell ad space, and major advertisers don't want a network with a few million subs."

Hallmark's parent company Crown Media Holdings Inc. agreed last week to give DirecTV 5.4 million shares, worth about $80 million, in exchange for upgrading the net from DirecTV's Family Pack, where it had 750,000 subs, to the more popular Total Choice package. The upgrade will take place in September. The deal gives DirecTV a 4.7% stake in Crown Media.

It's the first time that the Hallmark Channel has exchanged equity for subs, but it might not be the last. Crown Media President and CEO David Evans says the net would consider a similar exchange with a cable operator: "A stock deal is attractive because it lessens the cash drain."

The former Odyssey network, which shed most of its religious programming and relaunched as Hallmark on Aug. 5, still needs widespread carriage on Cablevision, Comcast and Cox, systems on which it has little or no distribution.

Lehman Brothers analyst Stuart Linde says the deal helps Hallmark get closer to the important 40 million-subscriber threshold. "If you're an independent network, it becomes more difficult to roll out more subs. The independents have zero leverage, while the MSOs are getting bigger," he notes.

As competition between digital cable and DBS heats up, Hallmark's presence on DirecTV may push more operators to carry the channel.

"Hallmark is buying competitive leverage," says Kagan World Media analyst Larry Gerbrandt. "Being on DirecTV puts pressure on the operators."

A Hallmark executive says the deal could pay handsomely for the channel if Rupert Murdoch's News Corp. succeeds in acquiring DirecTV from its parent Hughes Electronics. "If News Corp. acquires [DirecTV], they will throw money at this thing," the executive says. "This is going to be a helluva deal in one year, 18 months, because that 7 million will double."

The Hallmark-DirecTV pact also includes provisions for potential pay-per-view offerings of Hallmark programming.