Repeat layoffs at Machinima suggest a company in search of itself

By Michael Carney , written on September 18, 2013

From The News Desk

Sometimes moving forward means taking a few steps backward first. Or at least, that’s what management at YouTube multi-channel network (MCN) Machinima is hoping will be the case as the company today announced its second major round of layoffs in the last nine months.

Uh oh.

Those arguing that all MCNs are fucked just got a new talking point, but it’s not clear that this is more than just an issue within Machinima. It does mean, for better or worse, that Machinima is looking less and less like the golden boy of this lightning rod category. Rather, the company appears to be searching for its identity and for a viable path forward.

Variety was the first to report today’s layoffs of 22 of 206 total employees at the Los Angeles company. A similar round of cuts were made in December 2012 when Machinima terminated 23 of its then 200 employees. The December cuts came mostly in the company’s editorial, programming, and productions departments, according to statements from Machinima Editor-in-Chief Rob Smith at the time. Smith described those layoffs as "growing pains." The company has not specified which departments were affected by today’s round of cuts.

In a statement released to Variety today, Machinima wrote:
In connection with Machinima’s growth plan, the company is making an increased commitment to premium programming, its YouTube affiliate network and multiplatform distribution. As a result of an increased need for investment in these areas, Machinima is eliminating positions representing approximately 10% of the company’s workforce equating to 22 of 206 employees.
According to employee tweets, among those let go today were Redspawn programming manager Anthony Rogers and Counter Strike producer Scott Fisher.

As we reported in June, Machinima – like other YouTube-focused MCNs – has found itself at a crossroads as of late. Having achieved meaningful scale in terms of content and audience – which in Machinima’s case amounts to more than 2.2 billion monthly video views and 200 million monthly unique viewers as of June – these content aggregators have struggled to adequately monetize all those eyeballs. For most, the big investment in acquiring content and eyeballs has meant big losses financially.

There are many explanations for this fact, the most central among them being the low value of online video advertising rates relative to those of television, and YouTube’s less than favorable revenue sharing terms (The Google-owned video network is rumored to keep 45 percent of all ad revenue.)

The answer to this problem, according to most online video entrepreneurs and investors, is to invest in owned and operated websites and original programming. In this scenario, YouTube becomes an audience acquisition funnel which MCNs and content creators then look to monetize elsewhere.

Machinima has already begun heading down this path through the creation of its “Mortal Kombat: Legacy” series and through a March 2013 partnership with Ridley Scott’s production company, RSA, on the production of 12 science-fiction short films. All indications from the company are that it plans to double down in this area.

In our June coverage of Machinima, we reported that the company was seeking in the neighborhood of $80 million in new financing from a strategic investor, and was also exploring the possibility of finding a strategic acquirer. The prevailing wisdom in the industry is that this strategic partner would take the form of another media company that could contribute gaming and male-focused content IP.

The company has reportedly been meeting with studios including Warner Bros. and Paramount, the CBS TV network, private equity firm Guggenheim Digital Media, and publisher Adweek, among others. Another name that would seem to make sense as a likely suitor but for which there seems to be less evidence of active discussions is Microsoft, by way of its XBox franchise.

Today’s layoffs would seem to indicate that these talks have yet to result in a material investment, partnership, or acquisition. Machinima may be simply reallocating resources and seeking new skill sets to match its changing business plan, as it claims in its public statement.

But shedding 10 percent of your staff twice within a single year is surely not the sign of a company growing so quickly that it can hardly attract enough warm bodies to fill the seats – something you’d expect from a company trying to increase a $190 million valuation. Notably, the company does still have six job openings listed on the careers section of its website, including those in its business intelligence, marketing, and technology departments.

Machinima raised a $35 million Series B round in May 2012 led by Google, with participation from existing investors Redpoint Ventures and MK Capital. The company has raised $49.6 million to date, placing it squarely between its two chief competitors Maker Studios which has raised $64.5 million and Fullscreen which has raised $30 million. Awesomeness TV, another prominent MCN backed by MK Capital, was acquired by Dreamworks earlier this year for $33 million plus additional performance incentives. Not exactly the comp Machinima or its investors were looking for.

There are perhaps more questions than answers today about the viability of the MCN business model. Many smart people stand on opposing sides of the debate and in many case have made equally compelling arguments why these are dead companies walking and why these are the next Hollywood titans.

If Machinima is any indication, that road won’t be an easy one even for the largest, most well funded players.