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Warner Bros. Is Buying a Stake in Struggling YouTube Net Machinima. Here’s Why

Warner Bros. is leading an $18 million investment in Machinima, the once-dominant videogame-focused YouTube multichannel network that has been bleeding money and losing millions of viewers.

The funding round, which the MCN announced Monday, includes participation from previous investors Google, MK Capital and Redpoint Ventures. That brings Machinima to about $67 million raised following the $35 million round led by Google in May 2012.

But why is Warner Bros., whose interest in investing in Machinima has been rumored for months, plunking cash into the flailing digital media company?

Machinima has been a “pioneer and category leader in the YouTube MCN space,” according to Thomas Gewecke, chief digital officer and exec VP of strategy and business development for Warner Bros. Entertainment. And, given that Machinima has a deal for the Warner Bros. Digital Distribution-produced “Mortal Kombat” series, the studio has an interest in seeing the MCN survive.

“We’ve been impressed with Machinima as a distribution partner, and by their focus on creators and commitment to high-quality, exciting original digital content,” Gewecke said in a statement.

Still, Machinima isn’t financially healthy: Last week it axed 30% of its staff, essentially eliminating its ad-sales department, in its third round of cuts in 15 months. The company said it was shifting ad-sales strategy to rely on YouTube — another sign of distress, as MCNs typically make even less money on spots that YouTube sells than the 55-45 ad-revenue split the site grants partners.

According to Machinima chairman and co-founder Allen DeBevoise, the layoffs were “not really” related to the Warner-led investment round. Rather, they represented the company’s shift to YouTube as the ad-sales partner, with Warner Bros. the MCN’s strategic content partner.

SEE ALSO: Machinima Goes Netflix Route, Offers Up Full Season of ‘Mortal Kombat: Legacy II’

Machinima plans to use the $18 million round to grow its audience on YouTube, but also to produce more “premium content,” DeBevoise said, meaning material “that has value beyond YouTube.” That could encompass paid distribution models — including shows produced for TV — in addition to the free-to-watch MCN model, he added.

Machinima’s audience on YouTube has been rapidly evaporating, and the company has been unable to make up the difference on its owned sites or other non-YouTube distribution channels like its Xbox app. In October, Machinima had about 16 million unique monthly U.S. visitors on YouTube, less than half the 35 million users it registered a year earlier, according to comScore. Total video views over that period dropped 43%, from 521 million to 296 million.

Warner Bros., though, obviously still sees value in owning a piece of Machinima. The MCN claims to have 320 million subscribers worldwide across its multiple YouTube channels for its original content, which includes scripted series, animated shows and gameplay videos. How many of those regularly view Machinima content regularly, at this point, is another question.

Machinima maintains fairly high engagement rates: Its U.S. audience on YouTube watched an average of 73.3 minutes of video in October 2013 vs. 62.7 minutes for Maker Studios and 33.8 minutes for Fullscreen, per comScore.

The new funding could set Machinima on a path to long-term viability. The studio believes it can help rebuild Machinima into a more vibrant player — one that will need to generate more of its revenue off YouTube.

With the new funding, Machinima’s first order of business will be hiring a CEO. The company has been without a chief exec since DeBevoise gave up the CEO role last November. DeBevoise said Machinima is “really, really close” to landing a new chief exec and hopes to announce the hire within the next 10 days.

What Warner Bros.’ investment boils down to is that Machinima targets young male audiences. And for a relatively small amount of money relative to the rest of its biz, the studio will get a way to connect with that digital-native demo through games and other content.

“Machinima connects with a worldwide audience of millennial fans and creators,” Craig Hunegs, president of business and strategy for Warner Bros. Television Group, said in a statement. “We’re excited about the opportunity to work closely with Machinima and its channel partners to reach new audiences, create new original content and discover new talent.”

In other words, it’s a smart, low-risk play for Warner Bros., which has been ahead of the curve in the digital space among big studios and more willing to experiment.

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