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Schleiff's Hallmark: Getting Deals Done

10/06/2006 8:00 PM Eastern

In some ways, Henry Schleiff faces the same issues as the head of Hallmark Channel that he did eight years ago when he took over at Court TV.

Each was an independent network. Both had been on the block shortly before he came on board. And each had been plagued, from an advertising standpoint, with too large a percentage of older viewers.

And Hallmark, just like Court TV, faces the task of renegotiating crucial carriage deals with cable-system operators.

But Schleiff, who last week was named president and CEO of Hallmark parent Crown Media Holdings Inc., may not be under the gun quite as much as he was when he became Court TV's CEO in 1998.

“The first week I walked in, we got actual drop notices from cable operators,” Schleiff recalled. “Here [at Hallmark], we're not getting drop notices. If anything, cable operators like us. They clearly get our importance to them.

“Now the question is, can we create deals that are sensible for both the operator and for Hallmark Channel?” he said.

Therein lies Schleiff's big challenge: To create a viable business model for debt-laden Hallmark.

The family-friendly network shines as a Top 10-rated programmer, with a primetime rating of 1.3 in the third quarter, up 18% from 1.1 a year ago, according to Nielsen Media Research. But Schleiff's got to ratchet up affiliate fees and ad sales.

And he must do that as the network sets out to renew contracts with distributors representing 80% of its 74.7 million subscribers.

Hallmark's current deals with those distributors, which include Comcast Corp., Time Warner Inc., and EchoStar Communications Corp., will expire on or before the end of 2007.

THE DAY AFTER

A day after Schleiff was named, Crown Media took a step to address its balance-sheet issues, selling U.S. rights to its film library for $160 million to RHI Enterprises, the Robert Halmi father-and-son production company. Still, that will only pare down a fraction of Crown Media's $1 billion in debt.

To generate more cash flow, Hallmark Channel is under strong pressure to negotiate carriage renewals that secure “a reasonable price increase,” according to Alan Gould, a Natexis Bleichroeder Inc. analyst.

“There's no challenge getting the affiliation contracts renewed,” Gould said. “The challenge is getting them renewed at what I would call an improved rate from what Hallmark currently has.”

Hallmark's average monthly, per-subscriber license fee is in the range of 3 to 4 cents, according to Kagan Research and Wall Street analysts. Schleiff has to step that price up in an environment that's quite different than when he took the helm at Court TV, according to analysts. The two biggest cable operators, Time Warner and Comcast, now respectively control 14.5 million and 23.3 million cable subscribers nationwide.

“It is a more challenging time than when he built up Court TV,” Gould said. “There's been consolidation in the distributors. The balance of power has shifted to some degree from the programmers to the operators. And remember, Crown was for sale, and a lot of the companies he's negotiating with have seen his [Hallmark's] books.”

Hallmark Channel's license-fee average is so low because some distributors are now carrying it for free, according to Robert Routh, an analyst at Jefferies & Co. That will change as more of the free-carriage periods for operators expire before year's end, he said.

BOOMER POWER

Crown Media for the first six months this year had $95.5 million in revenue, an 11% gain from the prior year. But the company had a net loss of $274.7 million compared with $107.2 million in the prior-year period.

In seeking carriage renewals, Schleiff said he plans to stress the value — the buying power — of the Baby Boomers, the network's target demographic, to cable operators and advertisers.

His goal is to lower Hallmark's audience demographic, which is now at a median age of about 60, to better fit the 25-to-54 demographic the network is seeking.

Schleiff hopes to do that by taking advantage of holiday programming tie-ins to Crown's major shareholder, Hallmark Cards Inc.; possibly doing limited scripted series and lifestyle shows; and casting the network's telepics with younger stars.

Schleiff replaces David Evans, who left in June, several months after Crown failed to find a buyer for the basic network.

His appointment prompted Routh to speculate that Schleiff, 58, will ultimately wind up finding someone to acquire Hallmark Channel, and that the buyer could well be Time Warner Inc., which also owns Court TV.

“We would expect him to have to fix things organizationally and financially first, though,” Routh wrote in a report last week.

Schleiff stepped down from his role as Court TV CEO in May, becoming nonexecutive chairman after Time Warner bought the remaining 50% stake it didn't already own in the justice network from Liberty Media Corp. Time Warner paid $735 million to secure full ownership of Court TV.

Schleiff said he's unperturbed that Crown did not find a buyer for Hallmark before he arrived.

“They were asking a premium price for the network, and I think at the time they asked for that price, the marketplace had legitimate questions,” he said.

September