Warner Bros. Gets Ready to Bet on YouTube With a Machinima Investment

Machinima, the YouTube network for gamers, has finally found the money it has been looking for.

Or at least some of the money it has been looking for: The company is finishing up an $18 million round, led by movie studio Warner Bros., according to people familiar with the transaction. I’m told Machinima’s earlier investors, including Google, Redpoint Ventures and MK Capital, are participating as well. Warner Bros. and Machinima declined to comment.

Ahead of the round’s completion, Machinima will also lay off 42 employees as part of a restructuring of its sales organization to “create greater focus internally on selling creative ad solutions and branded entertainment,” the company said in an emailed statement on Thursday.

The $18 million investment is much less than the company was looking for last spring, when it was contemplating numbers that ranged from $35 million to $70 million.

And the valuation will be much less than the number Machinima wanted last spring as well, when sources said it was floating figures like $600 million, though Machinima executives always denied they’d sought a specific number. Industry chatter is that Machinima’s valuation may be around the same $200 million level it was at two years ago, when Google led a $35 million investment round.

Last week, The Wall Street Journal reported that Warner Bros was considering a Machinima investment that may include an option to buy the entire company.

Machinima’s long road for this round is partly a reflection of its own problems — several of the company’s top executives have left in the last year, it has had multiple layoff rounds, and is looking for a replacement for CEO and founder Allen DeBevoise — and may also be related to issues many video producers are having as they try to make money on YouTube.

Even companies that garner lots of eyeballs on the world’s biggest video site — and Machinima says it generates billions of views a month — have had a hard time turning that into a profitable business, because ad rates are low and much of the money they do make goes back to YouTube.

Many big YouTube networks, including Machinima, are trying to build businesses outside of YouTube as well. They are distributing their videos to other hubs, like Microsoft’s Xbox platform, and to sites they build themselves.

That said, the deal makes plenty of sense for Warner Bros., which already distributes content like its “Mortal Kombat” series through Machinima, and which is very interested in reaching the young male audience that Machinima already reaches. If Machinima does work, the studio has a nice foothold in online video. If it doesn’t, it’s a modest bet for a company that invests much more on each of its movies.

Updated: Adds statement on sales team reorganization.

This article originally appeared on Recode.net.

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