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Paying a price to be No. 1

Intel's plain-spoken CEO has a message for the nation: If you want to stay on top, it's time to rev up your competitive metabolism.

When Craig Barrett bows out as Intel's CEO next May, a piece of Silicon Valley history will go with him.

The San Francisco native helped perfect Intel's microprocessor manufacturing and has since navigated the company into new categories, with the launch of chips for digital home devices and the creation of new wireless technology.

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Lately, Barrett has been better known as one of the most vocal technology executives on the subject of education and American competitiveness, two issues he'll continue to follow after his retirement from Intel.

Barrett has experienced his own peaks and valleys since joining Intel in 1974, from price wars with Japanese rivals to the extravagant dot-com-fueled profits of the late 1990s. The Intel that current President Paul Otellini will lead will still dominate the PC processor business. But the market is changing. Intel faces lower margins as well as increased competition from longtime foe Advanced Micro Devices and new challengers from China and elsewhere.

CNET News.com editors recently spoke with Barrett.

Q: Roughly 70 percent of Intel's revenues are coming from emerging markets overseas. The cost of goods in emerging countries is being lowered. Do you see margins getting slimmer as you sell more products into emerging countries?
A: The hardware costs have been kind of under constant pressure forever in those markets, although interestingly, some of the emerging markets are very fast adopters of technology. The trivia question I like to play with people is, when we went from Pentium III to Pentium 4, which market toggled the fastest to 50 percent Pentium 4? What country made the fastest transition? The answer is China--faster than the U.S. Their business is growing faster there percentagewise than the U.S. But conventional wisdom would have said there is more pressure on Chinese markets from a price standpoint than the U.S., therefore China would buy down and the U.S. would buy up. But it doesn't work that way. They are brand-conscious, and they buy up in China.

The convergence of computing and communications has been driving business decisions within Intel. If you look out five years, what position will Intel have in this converged environment?
I don't expect our position would parallel our microprocessor position in computing. Nor do I think you will see the equivalent of an "Intel inside" brand in much of that space. The reason is economics. The guts of a volume cell phone have maybe $40 worth of silicon in it. The real issue is that $40 worth of silicon is not sufficient (dollarwise) to let you run a branding campaign similar to Intel inside.

We're not going to be successful by supporting the textile industry.
So how do you get inside consumer electronics devices?
The old-fashioned way. You design great technology and great parts that work better than the competition. We're still obviously struggling in the cell phone market to get good traction...But the only way you compete is the old-fashioned way: technology, price, customer service. Life is tough; you have to compete.

Microsoft is trying to get into consumer electronics devices just like you are. Is it going to be a little different than the PC stuff, where it has been Intel and Microsoft--Wintel--in lockstep?
Intel and Microsoft got into PC devices and grew up with the market. There is a consumer electronics market today and there are already entrenched players. Our job is not to try to displace the entrenched players; our job is get design wins with them. We're not trying to displace them, we're just trying to bring a better solution to their business.

As an engineer, and a true pioneer in this space, you must have a passion for certain devices that your processors go into. Which stand out for you?
Well, the BlackBerry, and I'm obviously a PC user. I'm a three-screen fanatic. A big-screen fanatic for entertainment, and I'm a PC fanatic for interactivity, and a BlackBerry user for cell phone and short communication. I don't really believe the arguments that these devices are dependent on one another. I think they are complementary.

So you don't have a houseful of gadgets?
No, I don't. But I do have a Montana ranch full of audio-visual gadgets. I have a big media room and all of that cool stuff, and a distributed sound system. I'm a digital camera person. I like those. But that's kind of the extent of it.

So you don't have a little lab in the basement where you design chips?

Click to see full image

No, no. I tie flies maybe, but that's it.

Tell us a little about the digital home. You talked about entertainment PCs. Are the competitors to Intel going to be different there than in the PC space?
I think you are clearly going to see the consumer electronics guys have some presence and some degree of experimentation here, as well as the PC guys. I think it is undecided whether this is a gateway PC or an intelligent set-top box--or if they all coexist. The challenge for us is to get design wins, wherever they are, and have them be Intel-based. One of the beauties of coming from the PC side is that the PC has been digital its whole life and as all of these devices go digital, you get to bring that capability into this space.

How long will it be before you have serious microprocessor competition in China?
We have always said that China will most likely follow exactly the same playbook as Japan. We're already seeing that starting to play out. Japan had its own vertically integrated companies which were computer and semiconductor and consumer electronics companies. China is going at it slightly differently. They're going at it from sort of a foundry infrastructure and putting that in place with a lot of small design houses. You have seen the attempt to create China-only standards just as there was a whole series of Japanese-only standards.

What's the next one?
I think you will see chipsets, processors and memory?the Chinese model will be: Let's start a foundry, and we will go from foundry to intellectual-property creation and end-user device creation. There's no question of that. But the competition there is exactly the same competition we've seen in our 35 years of existence. We've competed against European companies and Japanese companies and U.S. companies that competed with us directly. Now you're going to add China to that.

But competing with China is an order of magnitude different, if you look at the trade at this point.
On a relative basis, when we were competing with Japan in the 1980s, Japan was probably 10 percent of our market. China today is probably 10 percent of the market. It's not that much different from a market standpoint. There are a lot of parallels between the two.

But that won't be on your watch.
Well, I'll be watching it.

To switch gears a bit, let's talk a little about WiMax. You mentioned that there about 40 to 50 trials in place around the world, and we'll start seeing substantial rollout next year. What will happen to drive that rollout?
A couple of things. I think some of the big service carriers will adopt the technology and roll it out; that's one. And you will see the metropolitan rollout, which is what a lot of the trials are today. People are saying, "Broadband is good, but I can't get broadband from cable or from fiber or from twisted copper. The only way I can get it is through some wireless technologies."

What about some of the cellular-based technologies?
At first blush, everybody says there is competition between cellular-based technologies like GPRS (General Packet Radio Service) 3G and 4G, and WiMax and Wi-Fi. And I tend to see them as more complementary. You are even seeing some people announcing the rollout of Wi-Fi as a spectrum alleviator. That is, if I give you voice over IP and get you off of my 3G (third-generation) network, I don't have to expand my 3G network as fast. So it's a service savings. There has been an interesting trade-off in a lot of these instances. I still think the really interesting app is when you have a device that is not just Wi-Fi enabled, but 3G is built in, and ultrawideband and Bluetooth and WiMax (are) built in, and it self-configures.

So what would Intel do to help drive that? Would you have a marketing campaign like the Centrino (wireless) campaign?
Yes. We would have a marketing campaign, an investment campaign from Intel capital; you would see us provide the cost-effective, power-efficient solutions to make that happen. We're obviously playing in the Wi-Fi, wireless, ultrawideband, 3G, WiMax space.

And who puts that $200 WiMax box in residences?
It's a service provider. It's a business. Could be anyone from the metropolitan area to a broadband service provider. There are a lot of service providers looking at this, and it will be a combination of the disruptive service providers and the existing service providers supplying this.

You have talked about the U.S. not doing enough in jobs and education and infrastructure. Even if there was a concerted effort to boost education, how does that stem the offshoring of jobs?
Life is competitive. If you have the highest standard of living in the world, the only way you justify it is by having the most productive society in the world. The only way to be the most productive society in the world is to lead in new areas of technology, new areas of value-added. The only way to do that is to invest in R&D. It's no big secret. So there is going to be intense competition for new jobs. The only way to abate that in fact is you have an advantage in new fields. And the only way to do that is invest in R&D. I don't know any other answer. The numbers show you. The U.S. graduates 50,000 engineers each year. China graduates 300,000, India graduates 200,000, Russia graduates 140,000. So where is the U.S. going to be in (the) greater scheme of things if it is just a numbers game? You lose. The only way to win is if you have the best ideas, the most innovative products, and the only way to do that is with R&D investment, basic R&D investment.

I'm publicly listed as a Bush supporter...I've also contributed to Joe Lieberman's campaign, because Lieberman was the only one who was talking about these issues

If you have a better answer, tell me, and I'll go shout it from the rooftops. I don't know of another answer. We're not going to be successful by supporting the textile industry. Look at what (we've) done in the last few years. We've supported the textile industry, we protect the Florida tomato growers from competition, we protect ourselves from soft timber from Canada. And we have steel tariffs and agricultural subsidies. Which of those five areas is the industry of the 21st century?

I wouldn't trade places with AMD--ever. They are a good competitor; they make us better; we make them better. Together, we make better profits for the world. That's competition, that's good. But the only way we are able to stay in that fray is because we invest a lot in R&D and so does AMD. The United States is not keeping track with that. Nearly 25 years of flat dollars in physical science in basic research. I'm not saying that the government ought to support Intel. I'm saying the government ought to support that basic R&D at a university level for the benefit of the United States.

My point is, even if they did, the Chinese and others are already ahead of us.
You can only catch up by running faster. The problem is, we're not having this debate (nationwide). The government hasn't moved.

So who are you voting for?
I've already voted. I'm publicly listed as a Bush supporter. I contributed to his campaign. I've also contributed to Joe Lieberman's campaign, because Lieberman was the only one who was talking about these issues.  

CNET News.com's Jai Singh and ZDNet's Dan Farber contributed to this report.

the entrenched players; our job is get design wins with them. We're not trying to displace them, we're just trying to bring a better solution to their business.

As an engineer, and a true pioneer in this space, you must have a passion for certain devices that your processors go into. Which stand out for you?
Well, the BlackBerry, and I'm obviously a PC user. I'm a three-screen fanatic. A big-screen fanatic for entertainment, and I'm a PC fanatic for interactivity, and a BlackBerry user for cell phone and short communication. I don't really believe the arguments that these devices are dependent on one another. I think they are complementary.

So you don't have a houseful of gadgets?
No, I don't. But I do have a Montana ranch full of audio-visual gadgets. I have a big media room and all of that cool stuff, and a distributed sound system. I'm a digital camera person. I like those. But that's kind of the extent of it.

So you don't have a little lab in the basement where you design chips?

Click to see full image

No, no. I tie flies maybe, but that's it.

Tell us a little about the digital home. You talked about entertainment PCs. Are the competitors to Intel going to be different there than in the PC space?
I think you are clearly going to see the consumer electronics guys have some presence and some degree of experimentation here, as well as the PC guys. I think it is undecided whether this is a gateway PC or an intelligent set-top box--or if they all coexist. The challenge for us is to get design wins, wherever they are, and have them be Intel-based. One of the beauties of coming from the PC side is that the PC has been digital its whole life and as all of these devices go digital, you get to bring that capability into this space.

How long will it be before you have serious microprocessor competition in China?
We have always said that China will most likely follow exactly the same playbook as Japan. We're already seeing that starting to play out. Japan had its own vertically integrated companies which were computer and semiconductor and consumer electronics companies. China is going at it slightly differently. They're going at it from sort of a foundry infrastructure and putting that in place with a lot of small design houses. You have seen the attempt to create China-only standards just as there was a whole series of Japanese-only standards.

What's the next one?
I think you will see chipsets, processors and memory?the Chinese model will be: Let's start a foundry, and we will go from foundry to intellectual-property creation and end-user device creation. There's no question of that. But the competition there is exactly the same competition we've seen in our 35 years of existence. We've competed against European companies and Japanese companies and U.S. companies that competed with us directly. Now you're going to add China to that.

But competing with China is an order of magnitude different, if you look at the trade at this point.
On a relative basis, when we were competing with Japan in the 1980s, Japan was probably 10 percent of our market. China today is probably 10 percent of the market. It's not that much different from a market standpoint. There are a lot of parallels between the two.

But that won't be on your watch.
Well, I'll be watching it.

To switch gears a bit, let's talk a little about WiMax. You mentioned that there about 40 to 50 trials in place around the world, and we'll start seeing substantial rollout next year. What will happen to drive that rollout?
A couple of things. I think some of the big service carriers will adopt the technology and roll it out; that's one. And you will see the metropolitan rollout, which is what a lot of the trials are today. People are saying, "Broadband is good, but I can't get broadband from cable or from fiber or from twisted copper. The only way I can get it is through some wireless technologies."

What about some of the cellular-based technologies?
At first blush, everybody says there is competition between cellular-based technologies like GPRS (General Packet Radio Service) 3G and 4G, and WiMax and Wi-Fi. And I tend to see them as more complementary. You are even seeing some people announcing the rollout of Wi-Fi as a spectrum alleviator. That is, if I give you voice over IP and get you off of my 3G (third-generation) network, I don't have to expand my 3G network as fast. So it's a service savings. There has been an interesting trade-off in a lot of these instances. I still think the really interesting app is when you have a device that is not just Wi-Fi enabled, but 3G is built in, and ultrawideband and Bluetooth and WiMax (are) built in, and it self-configures.

So what would Intel do to help drive that? Would you have a marketing campaign like the Centrino (wireless) campaign?
Yes. We would have a marketing campaign, an investment campaign from Intel capital; you would see us provide the cost-effective, power-efficient solutions to make that happen. We're obviously playing in the Wi-Fi, wireless, ultrawideband, 3G, WiMax space.

And who puts that $200 WiMax box in residences?
It's a service provider. It's a business. Could be anyone from the metropolitan area to a broadband service provider. There are a lot of service providers looking at this, and it will be a combination of the disruptive service providers and the existing service providers supplying this.

You have talked about the U.S. not doing enough in jobs and education and infrastructure. Even if there was a concerted effort to boost education, how does that stem the offshoring of jobs?
Life is competitive. If you have the highest standard of living in the world, the only way you justify it is by having the most productive society in the world. The only way to be the most productive society in the world is to lead in new areas of technology, new areas of value-added. The only way to do that is to invest in R&D. It's no big secret. So there is going to be intense competition for new jobs. The only way to abate that in fact is you have an advantage in new fields. And the only way to do that is invest in R&R. I don't know any other answer. The numbers show you. The U.S. graduates 50,000 engineers each year. China graduates 300,000, India graduates 200,000, Russia graduates 140,000. So where is the U.S. going to be in (the) greater scheme of things if it is just a numbers game? You lose. The only way to win is if you have the best ideas, the most innovative products, and the only way to do that is with R&D investment, basic R&D investment.

I'm publicly listed as a Bush supporter...I've also contributed to Joe Lieberman's campaign, because Lieberman was the only one who was talking about these issues

If you have a better answer, tell me, and I'll go shout it from the rooftops. I don't know of another answer. We're not going to be successful by supporting the textile industry. Look at what (we've) done in the last few years. We've supported the textile industry, we protect the Florida tomato growers from competition, we protect ourselves from soft timber from Canada. And we have steel tariffs and agricultural subsidies. Which of those five areas is the industry of the 21st century?

I wouldn't trade places with AMD--ever. They are a good competitor; they make us better; we make them better. Together, we make better profits for the world. That's competition, that's good. But the only way we are able to stay in that fray is because we invest a lot in R&D and so does AMD. The United States is not keeping track with that. Nearly 25 years of flat dollars in physical science in basic research. I'm not saying that the government ought to support Intel. I'm saying the government ought to support that basic R&D at a university level for the benefit of the United States.

My point is, even if they did, the Chinese and others are already ahead of us.
You can only catch up by running faster. The problem is, we're not having this debate (nationwide). The government hasn't moved.

So who are you voting for?
I've already voted. I'm publicly listed as a Bush supporter. I contributed to his campaign. I've also contributed to Joe Lieberman's campaign, because Lieberman was the only one who was talking about these issues.  

CNET News.com's Jai Singh and ZDNet's Dan Farber contributed to this report.