While HBO is the focus of WarnerMedia’s big upcoming streaming launch, it’s actually Turner Networks that really drives the AT&T media division’s profits, according to MoffettNathanson analyst Craig Moffett.

And as WarnerMedia gets ready to launch HBO Max in April, it’s facing a flurry of potentially fraught carriage renewal deals with pay TV operators for Turner.

“HBO Mad is, after all, the initiate AT&T has called the ‘future of the company’ — [but] the center of gravity of WarnerMedia is not HBO … it is Turner,” Moffett wrote in a note to investors today. He said that Turner’s cable channels, which include TNT, TBS, CNN and Cartoon Network, accounted for 53% of WarnerMedia’s earnings before interest and taxes in 2019.

“For better or for worse, WarnerMedia’s future, at least for the next four or five years, depends more on Turner than it does on HBO Max,” Moffett added. “And here’s the problem: Turner hasn’t signed a major rental since 2014/15, when they did a flurry of deals with Dish, Comcast, Charter/TWC and Cox. Assuming five-years renewal cycles, all fo those deals will now be coming up for negotiation.”

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While HBO is the focus of WarnerMedia’s big upcoming streaming launch, it’s actually Turner Networks that really drives the AT&T media division’s profits, according to MoffettNathanson analyst Craig Moffett. 

And as WarnerMedia gets ready to launch HBO Max in April, it’s facing a flurry of potentially fraught carriage renewal deals with pay TV operators for Turner. 

“HBO Mad is, after all, the initiate AT&T has called the ‘future of the company’ — [but] the center of gravity of WarnerMedia is not HBO … it is Turner,” Moffett wrote in a note to investors today. He said that Turner’s cable channels, which include TNT, TBS, CNN and Cartoon Network, accounted for 53% of WarnerMedia’s earnings before interest and taxes in 2019. 

“For better or for worse, WarnerMedia’s future, at least for the next four or five years, depends more on Turner than it does on HBO Max,” Moffett added. “And here’s the problem: Turner hasn’t signed a major rental since 2014/15, when they did a flurry of deals with Dish, Comcast, Charter/TWC and Cox. Assuming five-years renewal cycles, all fo those deals will now be coming up for negotiation.”

As Moffett added, the “timing of these renewals couldn’t be worse” for WarnerMedia, as it tries to sustain core linear revenue streams while simultaneously transitioning its business to an SVOD model. 

“Turner’s two core cable networks, TNT and TBS, have been two of the worst performing networks in all of cable over the last five years,” Moffett wrote. “They have lost a staggering number of viewers, their length of tune has declined (a telling sign of falling engagement), and their ratings have absolutely cratered.

Turner Networks chairman and CEO John Martin told an industry audience Thursday that the programmer is no longer focused on traditional ratings, adding he would be happier to have smaller audiences that are more engaged with the company's content.

"We're no longer in the Nielsen, day part, CPM game,” Martin said at the MoffettNathanson Media & Communications Summit in New York Thursday. “We're in the fan-engagement business."

The rise of cord-cutters, cord-nevers and skinny bundles is reshaping the way that people watch TV. And over the top services like DirecTV Now (owned by AT&T),  Dish Network’s Sling TV and the recently launched Hulu Live TV, are encroaching on traditional pay TV outlets.

Turner parent Time Warner Inc. is currently in the middle of a $108.7 billion merger with AT&T, a process Martin said he was confident would be completed by the end of the year.  

Martin said that Turner has deals with several OTT providers and will likely have more. But the shift in consumer habits is setting the notion that networks should strive for the largest possible number of viewers on its ear.

“It’s become increasingly clear to all of us that we need fans, not viewers,” Martin said. "That’s a different concept in TV because TV has always been about getting as much reach as you can. I'd rather have a smaller audience that is more dedicated and that loves the products we have, versus casual viewing that may aggregate to greater reach. I think engagement si ultimately going to lead to monetization."

Martin also commented on the emergence of virtual MVPDs, adding that while smaller packages may not include all of Turner’s 10 channels, they will include enough.

“My guess is we’re not going to be able to get 10 networks in all of those packages,” Martin said. “But 85% of our affiliate fees are in four networks and 90% are in five. If we can get four or five, we’re in good shape. If that means you could grow the overall pool of subscribers, because aggregate bundles of networks are being bundled in a way that subscribers like better, so they’ll be more subscribers, we’ll be fine.”

Time Warner reported mixed second quarter results, as lower revenue at its Warner Bros. movie studio offset gains at its Turner Networks and Home Box Office units.

Overall revenue dipped 5% to $7 billion in the period, as sales at Warner Bros. were down 19.4% to $2.7 billion. At Turner, revenue increased 6.5% to $3 billion and increased 2% at HBO to $1.5 billion.

Operating income was flat at Turner in the period at $1.1 billion and down 5.3% to $481 million at HBO. Warner Bros. OI fell 9.7% to $308 million in the quarter.

Related:Time Warner Snares 10% Stake in Hulu

Tough comps to last year, which was a record quarter for the content company, and unfavorable foreign exchange rates for its international operations impacted results. Time Warner said despite those headwinds, it managed to keep operating income margins stable at about 25%.

“We had a strong first half of 2016, which puts us ahead of our original goals for the year,” Time Warner chairman and CEO Jeff Bewkes said in a statement. “Our performance reflects the creative excellence resulting from investments we’ve been making in the very best content. At the same time, we’re capitalizing on new distribution opportunities to take advantage of the growing demand for high-quality video content around the world.”

Warner Bros. is expected to benefit from strong expected box office from alternative superhero movie Suicide Squad, slated to open this week and recent successes like Central Intelligence and The Conjuring 2.

Evercore ISI Group media analysts Vijay Jayant and David Joyce said subscriber losses at Dish Network in the fourth quarter were likely due to some recent high profile content disputes with programmers, adding that the satellite giant’s future growth will be driven by its wireless spectrum and its recently launched over-the-top service, Sling TV.

Dish lost about 63,000 net video subscribers in the fourth quarter, slightly better than consensus estimates but likely driven by since-resolved programming cost disputes with Fox News Channel and Time Warner Inc.’s Turner Broadcasting.

Fox News went dark to Dish customers on Dec. 20 and returned on Jan. 15, after a contentious negotiating period where Fox claimed that as many as 90,000 customers dropped the satellite TV service provider through Jan., 7. About eight of Time Warner’s Turner Networks went dark to Dish customers on Oct. 20, but were restored about a month later after the parties reached an extension agreement through March. While neither Dish nor Turner have officially announced a formal carriage deal, because the channels are part of its Sling TV service, most observers believe a deal has been reached.   

Broadband subscriber additions of 114,000 also were slightly less than estimates, causing the analysts to postulate that Dish will focus more on wireless spectrum – it was one of the biggest bidders in the recent federal AWS-3 spectrum auctions – and Sling TV.

“Dish is transforming from a DBS company to an organization that has substantial spectrum assets and a fledgling over-the-top video service called Sling TV, which will be the focus of investor interest,” the analysts wrote in a note to clients. “We continue to believe that the spectrum assets are not fully valued within the portfolio and that Dish is more likely to be an arms dealer in the wireless business than an all-out competitor. We maintain our ‘Buy’ rating and $85 target.”

In a separate research note, Morgan Stanley media analyst Ben Swinburne said the results and the announcement that Dish CEO Joe Clayton will retire on March 31, signal that Dish is becoming a new company.

Swinburne noted that Dish plans to finance its purchases in the AWS-3 auction with cash on hand, which fuels his belief that Dish will concentrate on wireless offerings.

“…while the bigger picture remains unclear, this purchase increases the company's strategic optionality but also reinforces our view that Dish aims to enter the mobile business,” Swinburne wrote.

Dish stock was up 2% ($1.49 each) to $79.80 in early trading Monday.