Time Warner Inc.'s CNN is betting a tiny Vancouver company will help it outpace media rivals in the race to attract audiences as they migrate to mobile devices.
Zite Inc., founded by a Vancouver lawyer with fewer than 10 employees, built a personalized news application for the iPad, which was an instant hit when it was released in March. Using online-search ideas first developed at the University of British Columbia, Zite's app delivers information to readers and learns the nuances of a person's tastes, digging up unexpected stories from the far-reaches of the Internet.
CNN wants to use the technology for its own websites, and help Zite catch up with its bigger rival. News app leader Flipboard Inc., based in Palo Alto, Calif., was iPad app of the year in 2010 and is backed by top venture capitalists, along with Oprah Winfrey.
"CNN doesn't do a lot of acquiring," said KC Estenson, general manager of CNN Digital. "We saw something that was really powerful and really unique in Zite. These guys have been at it for six years. The technology that sits behind the application is really powerful."
For CNN, and other major media companies, the move is about the puzzle of the future of media consumption. Mr. Estenson said viewers and readers will always come to sources such as CNN for breaking news and in-depth analysis but acknowledged that the Internet and mobile devices have fractured attention.
The acquisition price was not disclosed. Recent reports suggest CNN paid as much as $25-million. Zite had been in talks with venture capitalists to raise at least $10-million to finance growth and Flipboard in April raised $50-million, valuing it at $200-million, indicative of investors' interest in promising digital companies and the potential of news delivered on devices such as the iPad.
Instead of raising money from investors, Zite is the latest in a long list of small Canadian tech companies to sell rather than build themselves. The Vancouver company will become headquartered in San Francisco.
Zite's union with CNN - where it will remain an independent venture - comes after clashes with mainstream media. Zite was threatened with legal action after its app was released but rejigged its product to sate the likes of Associated Press and Getty Images.
Large media companies need to learn from new technology companies, not sue them, said Mathew Ingram, a technology analyst at GigaOm. "If CNN is trying to figure out what publishing is all about in a digital age, that's smart," he said.
But Mr. Ingram worried Zite would wither within the much-larger CNN organization and questioned CNN's strategy. "Sure they're digital in the sense they have a lot of websites, but so what - my aunt has a website. It's not innovation."
Zite (whose name is a play on the word zeitgeist) mulled various offers and decided the CNN deal made the most sense, for money and growth. More than 100,000 copies of Zite were downloaded in March but the company hasn't updated the figure since. Mark Johnson, the Zite chief executive officer hired this spring from Microsoft Corp., said CNN provides the money to expand and is "the best way to get Zite in the hands of the most people."
The company, which raised about $4-million from angel investors and government grants, was co-founded by Ali Davar, a Vancouver lawyer who saw potential in technology developed at UBC. The company built an Internet search engine but it failed to catch on. The plan was abandoned and attention turned to a news app for the iPad.
Expansion is a challenge for small Canadian upstarts, said Kunal Gupta, the chief executive officer of Toronto's Polar Mobile Group Inc., which makes apps for mobile phones and has opened offices in New York, San Francisco and Dubai. He noted the decision to sell involves the expectations of early investors but said a successful sale can be a "good thing" for the Canadian tech industry.
"It'll encourage more people to take entrepreneurial risk. It shows it's a path you can pursue," Mr. Gupta said.
The spate of deals for small Canadian tech companies might also encourage investors in the moribund domestic venture capital business, according to technology analyst Mark Evans.
"Who knows, maybe Canada's cautious, reluctant, recalcitrant venture capitalists will be emboldened enough to get in the game rather than watching from the sidelines," commented Mr. Evans on his blog.