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Intel Inside The Third World


By Bruce Einhorn Middle school #156 in Malinalco, an hour and a half drive from Mexico City, is so strapped for cash that it can't even keep the lavatories stocked with toilet paper. Nearly half of the school's 211 students live below the poverty line. But on this June morning, 30 eighth graders are hunched over their desks, tapping on the keyboards of pint-size laptops donated by Intel Corp. (INTC) Chemistry teacher Martina Rosas is giving the students a crash course on Web searching. "The kids participate more in class and are much more interested in reading and investigating online," says Rosas, who herself recently completed 60 hours of computer training.

Intel wants to bridge the Digital Divide and pioneer a whole new market by filling classrooms in poor countries around the world with low-cost PCs. Priced at about $320 each, the new Classmate laptops on the desks in Malinalco are still too expensive for governments in most developing countries to purchase. Even so, they have allowed the chipmaker to steal a march on Massachusetts Institute of Technology professor Nicholas Negroponte, whose foundation, One Laptop per Child (OLPC), is on a mission to build easy-to-use, energy-efficient computers that will eventually sell for $100 or less. While Negroponte's OLPC is still trying to work out all the kinks in its XO laptop, now projected to cost $175, thousands of Intel Classmate machines have been rolling off the production line since March at a Chinese factory owned by Taiwanese manufacturer Elitegroup Computer Systems Co. (ECS). Intel already has trials under way in more than 10 countries, with 25 planned by yearend.

The contest between Intel and OLPC has been an odd one, not least because the two sides are so unevenly matched. In one corner stands one of the world's most powerful tech giants, and in the other, a tiny philanthropy that has drummed up modest backing from the likes of Google, eBay, News Corp., and Advanced Micro Devices. (AMD) Negroponte has repeatedly criticized Intel for what he considers its hardball tactics. And yet the rivals may be ready to bury the hatchet: BusinessWeek has learned that Intel and OLPC executives are in talks regarding how they can work together.

It's unclear what the cooperation might involve. It's also not certain the two programs—either individually or in some kind of joint venture—will improve education or succeed in spreading useful technology through the developing world. But the race already has shed important light on how Intel plans to grapple with sluggish growth in the global PC market. The company's swift response to Negroponte also reveals how nimbly Intel can maneuver when necessary.

Under CEO Paul S. Otellini, Intel has been going through a painful transition. Its microprocessors still dominate the PC landscape, but the world of cell phones and other mobile gadgets is expanding much faster. Such products consume more chips than PCs do, perform many of the same functions, and are more popular throughout much of the world.

`NEXT BILLION'

A marginal player in cellular markets, Intel must find a way to sell to the "next billion," industry lingo for consumers in the developing world who don't yet have easy access to the Internet. The education market—and products such as the Classmate—presents a major opportunity, says Martin Gilliland, Asia-Pacific research director for Gartner Inc. (IT), because even if Intel's margins on such devices are razor-thin, volumes could soar into the hundreds of millions. Intel could expand the PC user base "not by fractions, but by high double-digit percentages," Gilliland says.

The first big challenge for Intel is bringing down the Classmate's costs. Unlike Negroponte's XO device, whose specially designed user interface aimed at first-time computer users is a deliberate break from the world of Intel chips and Microsoft software, Intel's machines are largely stripped-down versions of today's "Wintel" PCs. Intel's formidable clout with Asian parts suppliers lets it buy key components practically at cost, allowing it to shoot for a sub-$300 price tag. "We have chosen to ride on the existing technology curve and drive down the cost that way," says Michael T. Zhang, Intel's general manager working on the project in Shanghai.

So far, the approach seems to be working. Intel was able to move the Classmate PC from the drawing boards into production in less than 18 months. In early June, the company announced that it had enlisted Taiwan's Asustek Computer Inc. to make another laptop based on the Classmate design, but priced even lower, at $200. "This is what we do for a living," says L. Wilton Agatstein, the Intel vice-president in charge of the Classmate initiative. Perhaps more important, the project has forced Intel to expand its frame of reference beyond hardware. In Mexico and elsewhere, Intel bundles its Classmates with education software and teacher-training support. "That's something Intel needs to be credited for," says Gartner's Gilliland. "They have stretched beyond their normal area of interest without treading on anyone's toes."

Negroponte has said that he has no intention of ceding Mexico and other struggling nations to Intel. He has met with Mexican President Felipe Calderón and has sought out Mexico's richest man, telecom billionaire Carlos Slim, who says he's interested in helping OLPC. But there is one obvious obstacle: Negroponte still has no commercial laptops to put into the kids' hands, whereas Intel has signed up with a local distributor and launched two trials for the Classmate, in Guadalajara and Malinalco. The company plans to have ECS, its Taiwanese partner, produce over 1 million Classmates by the end of the year.

In the past, Negroponte has accused Intel of trying to crush his nonprofit, in part because OLPC buys its most important chips from Intel rival AMD. He also has complained that Intel is using its laptop program to pump up demand for its microprocessors in developing countries. "They look at it as a market," he says. "But primary education in the developing world is not a market, it's a human right. And I don't think Intel is in the human-rights business."

Collaboration, clearly, would erase some of the ill will. And a framework for this already exists. In earlier interviews, Intel's Agatstein has said he gets along well with Negroponte and that the two talk regularly. Agatstein has praised the way Negroponte works with Linux software developers to come up with applications for his laptop. "We have learned from Nicholas," he says. In a best-case scenario, a collaboration between Intel and Negroponte would greatly improve access to advanced technology in countries around the world.

But not everyone agrees laptops are the best way to go. "The phone itself is going to be the low-cost computer," argues Irwin Jacobs, chairman of Qualcomm Inc. (QCOM), the San Diego designer of chips for handsets.

OBSOLESCENCE

For a California company called NComputing Inc., the solution to the world's Digital Divide lies in "collective computing." NComputing CEO Stephen A. Dukker boasts that, for as little as $11 per user, schools or governments can deploy a network of "thin clients"—desktop machines that have no central processing units but are connected to a server, solving the problem of servicing laptops when they break down. "You require a complete, well-thought-out ecosystem to avoid winding up with stacks of these machines with broken screens, just collecting dust," Dukker says.

Still others argue that attention to computers distracts from bigger problems, such as poor school infrastructure, student nutrition, and chronic teacher shortages. "Would one computer per child help? If there's a lot of guidance and a lot of good content, yes," says Barbara Mair, a former president of Compaq's Mexico subsidiary and consultant to the government on technology adoption who runs management consulting firm Medida y Compás. "Do I see that as feasible in Mexico in the short term? No."

Intel is pushing ahead despite the naysayers. And it's adjusting the Classmate to serve a new target: kids in the U.S. The company recently launched trials in Sacramento and Portland, Ore., and next year it may unveil a souped-up version of the Classmate with more storage and faster processing speed for children in the developed world.

With Geri Smith in Malinalco, Mexico, and Cliff Edwards in San Mateo, Calif.


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