Cites Inefficiency of Stand-Alone Crown Media Effort

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NEW YORK -- Hallmark may have to come up with a card for getting out of the branded entertainment business.

At a time when marketers are realizing the potential of launching entertainment divisions and ambitious repositories of content, the greeting card giant is looking to unload its entertainment assets.
Hallmark is bailing out of its cable TV channels despite dramatic increases in viewership.

Not efficient

Crown Media Holdings, which operates the Hallmark Channel and Hallmark Movie Channel, put itself on the block in August, saying it’s simply not efficient to run a stand-alone operation in an era of conglomerates. Privately held Kansas City-based Hallmark Cards owns 83% of Crown Media.

The potential sale comes at a time when the Hallmark Channel is gaining viewership.

The channel, with its lineup of family-friendly, female-skewing programming, has experienced tremendous ratings and distribution growth in the past few years. Its third-quarter 25-54 target viewers were up 28% over the same period last year. It was also aging down, growing its 18-49 viewers 38%, according to Nielsen Media Research. The network is in 69 million homes and, in 2004, saw a 32% increase in advertising revenues.

Yet its financial performance hasn’t been a particularly bright spot. In 2004, it lost $3.03 a share and the first six months of 2005 it lost $1.03 per share. In the past, it has had to pony up dollars to secure a spot on the channel lineups of major cable operators or, in the case of News Corp.’s DirecTV, offer shares of the company to gain carriage. It also recently sold its International assets for the disappointing sum of $242 million. And as it tries to grow the distribution of its digital network, Hallmark Movie Channel, having the backing of a powerful media company could prove invaluable.

Observers disagree

But some maintain Hallmark Cards is wasting a valuable branded entertainment opportunity by siphoning off the network at a time when marketers are undertaking ever-more-ambitious roles as content creators.

“Imagine if Nike had a 24-hour-a-day-seven-days-a-week fitness channel and what an unbelievable marketing position that would be for them,” said one executive familiar with the channel. “This is a missed opportunity because the business has been run with an eye toward selling it rather than making Hallmark cards more relevant.”

To be sure, said Steve Doyle, a spokesman at Hallmark Cards, Hallmark Channel was “absolutely a branded entertainment play as a way to extend the Hallmark brand into people’s lives in a new way.” He said that should a transaction occur, the company would consider licensing the Hallmark name.

But without Hallmark Cards maintaining majority control of Crown Media, its ability to lend direction and create cross-promotional campaigns will be limited.

The two entities have tried to create synergies -- and with success, most sides will say.

In 2002 the channel’s Senior VP-Marketing Chris Moseley led what she called a “seminal all-day brainstorming session” with executives from cards, Crown Media and six of the top cable operators. The group built a set of the cross-promotional holiday efforts between the network and the 4,200 retail stores -- the second largest retail network after Radio Shack, executives say, focused on driving TV tune-in, store traffic and advertiser opportunities. Each year, the network would sell those multimillion-dollar holiday retail tie-ins to between seven to 10 advertisers.

'Expensive branded entertainment vehicle'

But, Ms. Moseley said, “one cable network’s business isn’t a P&L [profit and loss] model that necessarily makes the most financial sense ... it’s an expensive branded entertainment vehicle.”

A branded entertainment pioneer when it launched its Hallmark Hall of Fame TV series, today Hallmark Cards is still two-thirds owned by the original Hall family; CEO Don Hall Jr. is the grandson of founder Joyce Hall. It isn’t, according to sources close to the company, thought of as a particularly media-savvy company.

Of course, being privately held, Hallmark Cards doesn’t face bottom-line sales and marketing pressures as most of its public contemporaries. Its 2004 sales were flat and 2003 sales were up a mere 2%.

Crown Media is expected to fetch between $1.2 billion and $2 billion, depending on what kind of archived programming is thrown in, analysts said.

Interested suitors

Time Warner, Viacom, News Corp. and Disney are all said to be interested in the networks.

But if Hallmark Cards cashes out, it will face the mounting challenge of having to build a business model that takes advantage of the Internet and communications and virtual greeting cards -- a product for which few are willing to pay.

Said one Crown Media executive: “[Hallmark] doesn’t understand how the channel could contemporize the Hallmark brand and make cards more relevant. When greeting cards go the way of horse and buggy, we’re in a position to help cards carve a business out of that new technology.”
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