By Gerry Shih
SAN FRANCISCO (Reuters) - Tubular, a small San Francisco start-up that provides analytics for YouTube content creators, has raised $2.5 million in venture capital in the latest sign of how far the business ecosystem has evolved around the Google-owned video repository.
YouTube was once known as Wild West of online video, but over the past two years Google has focused on raising the quality of YouTube content through a series of direct investments and the cultivation of third-party "networks".
The result is a cluster of small studios, mostly based in Los Angeles, that acts like a digital Hollywood, pumping out slick YouTube hits.
With the ultimate goal of hosting enough high-quality content to lure big-spending advertisers to YouTube, Google doled out more than $100 million last year in grants to its networks and bedroom stars.
In May Google led a group of investors who poured $35 million into Machinima, a leading network, to stoke growth in the YouTube industry.
That market has now grown to the point that it can support its own start-ups, says Tubular's founder Rob Gabel.
As more semi-professional and professional YouTube creators enter the sector, with increasing competition among them, there is a growing need for analytical services.
Tubular is one such service, allowing customers to monitor and measure when videos get the most views and comments, or the sources of referred traffic.
The software includes a dashboard that displays the real-time analytics, which are generated by tapping into a stream of data provided by YouTube.
"If YouTube is a multibillion-dollar market, then that's billions of dollars going out to content creators who can then invest that again," said Gabel, a former Machinima employee.
"On every platform, from Google to Facebook to Twitter, people have turned to third parties' helpful tools."
At a high level, the pie is large and continuing to grow rapidly. Former Citi analyst Mark Mahaney estimates that YouTube will bring Google a total of $3.6 billion in 2012.
Rich Heitzmann, a co-founder of FirstMark Capital, which led Tubular's latest funding round, said that Google is far from wringing out all of the potential revenue from YouTube.
"We think the ecosystem is at least the size of Facebook's, considering it has a billion users and if you consider the time spent on YouTube," Heitzmann said.
"The advertising opportunities are there, and yet the ecosystem hasn't evolved technologically."
Other investors in Tubular's first tranche of equity financing included High Line Venture Partners, SV Angel, Lerer Ventures and Bedrocket Media Ventures.
Still, Gabel is betting that he can create a long-term, sustainable business on YouTube's platform at a time when some Silicon Valley companies are wary of building on the backs of larger companies.
Twitter, for instance, courted controversy this year when it made a business decision to shut off its firehose of data for a number of popular third-party developers to drive more visitors to its own site.
Allen DeBevoise, the CEO of Machinima who is also a Tubular investor, said that YouTube has reason to foster its independent developers rather than squash them.
"It's a thriving and fast-moving ecosystem now," he said. "But a lot of players are needed to make it all work."
Though Gabel acknowledges that the YouTube industry's rapid expansion is no guarantee of success, he has high hopes.
"Everything is a bit of gamble," he said, "but I feel good gambling on YouTube and online video."
(Editing by David Goodman)