Pixelfish, armed with $3.5 million round of new capital raised since October, is evolving its model from a white-label provider of affordable SMB video to a destination site for SMB offers. Today, it announced that it has acquired Steve Espinosa’s Backyard/CitySquares to act as its infrastructure.

Pixelfish was founded in 2006 and has recently settled on a model that reclassifies SMB video. Its partners include Yellowbook and Jivox.

“Combining Backyard’s revolutionary technology with Pixelfish’s software-as-a-service video creation, distribution and tracking application allows us to deliver immense value for local advertisers and consumers,” said Pixelfish CEO John McIntyre, in a release. “We know what video ads work best where for each local business.”

Backyard, a new start-up, has been ramping up quickly. It has 500,000 unique visitors in the suburban Southern California areas of Orange County and Riverside County after just a few months. It acquired Ben Saren’s CitySquares in December, and has launched an intense telemarketing-based effort.

The company is headquartered in Temecula, 50 miles north of San Diego. The new entity will be known under the CitySquares brand (it owns the www.citysquares.com, but not backyard.com. It has been using bckyrd.com, Svngr-style.)

It will have 50 employees, including 20 from Backyard, and will soon be moving into a new 12,000-square-foot facility, says Espinosa. Pixelfish, however, will retain its Torrance, California, office near Los Angeles, and its separate business.

With Pixelfish’s backing in hand, Backyard/CitySquares will be hitting affluent neighborhoods in major metro markets by April, including New York, Chicago, San Francisco and Los Angeles. It will also be launching partnerships with major media companies, initially focusing on newspapers, says Espinosa, who will be the company’s CTO (and a significant shareholder in the merged enterprises).

While terms of the sale were not disclosed, it is said to be in the range of $3 million to $5 million, consisting of cash and stock. Backyard’s angel investors included Dave McClure from 500 Startups, former Google CEO Eric Schmidt and Jason Calacanis.