News

Hallmark Ponies Up for DirecTV Carriage

8/26/2001 8:00 PM Eastern

DirecTV Inc. last week acquired a minority interest in family programmer Crown Media Holdings Inc. by agreeing to boost distribution of Crown's Hallmark Channel, known as Odyssey Network prior to its relaunch earlier this month.

The suburban Los Angeles-based direct-broadcast satellite provider has long eyed ties to the Hollywood community. Some said that's one reason DirecTV's top executives have seemed to favor a merger deal with News Corp. parent Rupert Murdoch over one with a company that isn't affiliated with programmers.

In a new twist on payment for carriage, Crown agreed to give DirecTV 5.4 million shares of common stock. In return, DirecTV agreed to move Hallmark Channel from its Family Pack tier to a more widely distributed Total Choice package.

The companies said the deal would add 7 million subscribers to Hallmark's ranks, and bring the network's total U.S. base to more than 40 million households by late September.

As a formality to satisfy Delaware regulations, DirecTV paid $54,000 for the Crown shares, which were worth more than $83 million following the announcement last Tuesday.

"There are very few places you can go to get this kind of distribution in one fell swoop," DirecTV senior vice president of programming acquisitions Michael Thornton said.

Crown president and CEO David Evans predicted that the DirecTV deal could carry some weight as Hallmark looks to other providers to increase distribution for the channel.

"It's a lot easier to go out and sell yourself to other distributors if you're a sizable and well-regarded programmer," Evans said.

The DirecTV deal has no exclusivity clause. Thornton said DirecTV would encourage Hallmark to expand the channel's distribution, "given we have an ownership stake in this."

According to one top MSO programming executive who asked not to be named, it's fairly common for network-carriage deals to include an equity stake for the operator.

For example, Oxygen's carriage agreements include offers of equity warrants to operators who meet certain subscriber-penetration milestones during the first five years they carry the women's network. Because Oxygen launched in 2000, neither DirecTV nor other operators would be eligible to cash in on those equity arrangements yet.

The MSO executive said the DirecTV deal was a positive for Crown Media, given the value of carriage to a network — and especially considering the price that a widely-distributed network can command when put on the auction block.

A critical mass of eyeballs also helps to draw more advertisers.

Evans called the added distribution for Hallmark Channel "the most attractive part of the deal," but noted that there were other positive aspects in the strategic partnership with DirecTV.

The companies have agreed to explore the feasibility of developing interactive applications for DirecTV's television and broadband-Internet subscribers, including "V greeting" cards that boast the Hallmark brand and a Crayola Kids' Club interactive-crafts application. Crown has tested interactive services, including video-on-demand, through the streaming portal Sharkstream in Singapore and with Yes Television in Hong Kong.

"We believe DirecTV has the critical mass of viewers to make those applications exciting," Evans said.

There's no official timeframe for a possible U.S. launch for the interactive services. Both Evans and Thornton indicated it was too soon to discuss pricing, although it would likely be on a fee-per-usage basis.

Evans said he's also looking forward to deploying interactive services to more than 5 million British Sky Broadcasting plc customers in the United Kingdom. BSkyB is often seen as a model for the kinds of new services DirecTV would introduce if BSkyB owner Murdoch were to buy DirecTV.

Murdoch did not influence DirecTV's talks with Crown, Thornton said.

"It is my understanding that News Corp. is very interested in ITV, but our talks with Crown had nothing to do with the News Corp. talks," Thornton said. DirecTV and Crown had been in negotiations for the past 13 months, Evans said.

DirecTV "had to get comfortable" with the channel's new brand and focus, said Thornton, who added that the programmer's efforts played a role in helping to boost distribution.

The Hallmark Channel carriage deal runs through 2007. Thornton would not comment on license fees.

"We're pretty close to the ceiling of what we can charge our customers for multichannel television," Thornton said, hinting that DirecTV would not likely be generous with license fees for new networks.

Instead, DirecTV hopes to work with content providers to find ways to boost sales of advanced interactive services to its customers.

The companies did not say which hardware technologies would support the new Crown Media interactive services. First-generation DirecTV receivers are unlikely to be able to support the new interactive content.

As part of the strategic partnership, DirecTV may also look to Crown to supply pay-per-view programming from its Hallmark Entertainment library, which Evans said boasts over 700 titles.

Evans did not appear timid about the prospect of competing with recent theatrical hits on the PPV lineup.

"There's a shortage of [PPV] product suitable for viewing by the whole family," Evans said.

Earlier this year, DirecTV aired Hallmark Entertainment's Cleopatra
on PPV following a run on ABC Television Network.

Although DirecTV's Total Choice package is widely deployed, it's not available in all 10 million of the DBS provider's households. DirecTV does not require customers to buy through a basic package in order to access out-of-market sports packages or pay-per-view movies, although other fees may apply for those who don't buy a certain base level of programming each month.

September