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Hallmark, Martha Stewart Exploring New Lifestyle Cable Channel

Two of the most recognized American brands, Hallmark and
Martha Stewart, may be joining forces behind a new lifestyle cable channel. Crown Media Holdings, the
parent company of Hallmark, is holding preliminary talks with Martha Stewart
Living Omnimedia about forming a new company jointly
owned by both outfits. If the talks move ahead, the two partners may seek to
bring in a third party such as a private equity partner to help fund expansion.

The rationale behind such a get-together is simple: Crown
Media, which operates two programming services, Hallmark Channel and Hallmark
Movie Channel, wants to tap Martha Stewart Living Omnimedia's digital expertise, while MSLO wants a bigger stake in the TV business. And if Oprah's getting
her own channel, why not Martha?

Executives stress that the talks are in the very early stages.
The result could be a much smaller joint venture deal that would have the two
firms simply agreeing to launch a new joint venture channel, tentatively called
Hallmark Home. According to sources, the partners have already been sounding
out distributors about plans for the service.

A spokesperson for MSLO declined to comment. Representatives for Hallmark Channel were not immediately available.

The companies' first partnership was announced in January.
The Hallmark Channel revealed a multi-yearstrategic partnership that has The Martha Stewart Show moving out ofsyndication and over to cable. NBC Universal was the distributor. Hallmark
will air the Mark Burnett-produced show in September. In their dealings for the
show, the two companies found they had much in common and talks grew toa second deal, involving access to the entire Martha Stewart programminglibrary in the U.S. market beginning this month.

Starting March 29, Martha-branded shows will air on Hallmark
seven hours a day. The two will also develop a series of specials throughout
the year. The new shows will help Hallmark hone its brand as one closely tied
to celebrations and feel-good moments, a theme that's likely to be an
attraction for advertisers. The various shows will be sold jointly by the sales
teams at Hallmark and MSLO, though one headache might be modifying the high CPM
for a syndicated show to that of a cable property. Cable is typically priced
more modestly than broadcast.

The talks with MSLO indicate Crown Media's decision to take a more long-term view of its businesses after several years of exploring a sale. The company previously had talked to numerous potential acquirers, but its debt had always been a turn-off with suitors. In May 2009, Henry
Schleiff stepped down as CEO, while Crown executives said the services were no
longer for sale. Schleiff was replaced by Bill Abbott, the former ad sales
chief, who has been moving fast to reorient the service and broaden

Hallmark is moving many of its made-for-TV movies to its
sibling Hallmark Movie Channel and trying to attract younger viewers. CEO Abbott is also retooling the flagship network
to compete directly with other lifestyle services such as Scripps Networks
Interactive. Ironically, repeats of The Martha Stewart Show and another,
quirky show, Whatever Martha, were airing on Scripps' FLN, which is
being relaunched as The Cooking Channel. The FLN-Cooking changeover sent the
MSLO staff looking for a new TV deal.

According to SEC documents, Crown is planning to
recapitalize its debt, with Morgan Stanley acting as its financial advisor.
Crown Media is 70% owned by the Hallmark greeting-card company. Now that Crown
is thinking more long-term, a bigger financial partnership with MSLO could
dramatically raise the value of its two cable channels.

Crown Media Holdings recorded a net loss of $22.5 million in
2009, down from an annual loss of $37 million in 2008. Total revenue was $279
million in 2009, a slight decrease on 2008. Ad revenue was $214 million;
Hallmark Cards spent $775,000 on advertising with Crown last year. Subscriber
revenue was $63 million.

MSLO had a net loss of $14.5 million for 2009, a slight
improvement on the 2008 loss of $15.6 million. Revenue from broadcasting was
$46 million, and $17 million from Internet operations. MSLO also houses
publishing and merchandise business segments.