Negroponte on Intel's $100 laptop pullout

(Fortune) -- On Thursday Intel (INTC, Fortune 500) announced it was dropping out of the non-profit One Laptop Per Child (OLPC) organization, which was set up to develop and market a low-cost - ideally $100 or less - education-focused laptop for the poorest children in the world. The device, called XO, is now in production in Taiwan and in use in a number of countries. Fortune's David Kirkpatrick spoke Friday with Nicholas Negroponte, founder and chairman of OLPC. A transcript is below.

Among other things, Negroponte said that 162,000 XOs had been sold in the U.S. for $399 in the last two months - generating $35 million - in an initiative called Give One Get One, which was aimed at raising money to speed the deployment of the machines to poor countries around the world. Though Negroponte has all along pushed for countries to purchase XOs in large numbers, OLPC has had unexpectedly large difficulties getting them to do so.

According to Negroponte, that was partly because Intel, which had earlier this year become a partner and board member of OLPC, was actively competing with it by selling its own Classmate educational PC-an innovative machine but still more conventional than the XO, given that it uses Microsoft's (MSFT, Fortune 500) Windows operating system. The XO uses open-source Linux software, a low-power chip from Intel's smaller rival AMD (AMD, Fortune 500), and includes extensive original software designed to help kids teach themselves. (Intel insists that it still supports the idea of providing laptops to underprivileged children, and that more than one approach is the best way to achieve that goal.)

Fortune: What's the biggest single reason your partnership with Intel fell apart?

Negroponte: The biggest single reason was that they were directly selling their Classmate laptop as opposed to having it be a reference design. They're not selling it in this country because they'd be killed by their biggest customers like Dell (DELL, Fortune 500). But in the developing world they are selling directly. It just set them apart from every single one of our other sponsors [which include AMD, Google, News Corp., Taiwan's Quanta Computer (which builds the XO), and Florida-based distributor Brightstar]. When Intel joined us we thought we could move toward that being a reference design more and more, and less toward them selling the Classmate itself.

But oddly it went in the other direction. And then they started using their position on the board of OLPC as a sort of credibility statement. When they disparaged the XO to other countries they said that they should know about it because they were on the board. They even had somebody go to Peru, which was a done deal for OLPC, and rant and rave to the vice minister in charge. He dutifully took copious notes and was stunned.

And he shared them with you? Yeah. It was unbelievable. "The XO doesn't work, and you have no idea the mistake you've made. You'll get yourselves into big trouble," and that kind of stuff. We kept the sale of course, but when one of your partners goes and does that, what do you do? It first happened in Mongolia. And at that point [Intel CEO] Paul Otellini called me and basically asked to not be thrown off the board, because they were going to change their ways. But they didn't.

Why, do you think? He's got 100,000 people and he can't control all of them. That's part of his problem. When I sign a nondisparagement clause that means all our people. He said we'll get a machine ready for CES and make a joint statement together there. As recently as three days ago we still thought we were going to introduce it. We had asked them to do very very small things and they just decided not to.

Do you wish OLPC and Intel could be less acrimonious? Well, we weren't acrimonious for 7 months. But they signed an agreement and didn't do one single thing in the agreement.

Like what? Nondisparagement is the easiest. That clause they violated all over the place. They said they'd work on software, but they didn't touch it. We said we'd work on the architecture together, and that wasn't done. We said we'd work on a processor and to this day don't have a spec on it. The nonfulfillment on theiir side was so continuous I don't even know what to say.

So the real issue was they were competing with you? We're like the World Food Program and they're McDonald's. They can't compete. They are both food organizations but for completely different purposes. If the Classmate were in the hands of every single child in the world, that would be pretty good. Could it have better power charcteristics, a better display, etc.? Sure, that would be good. But I don't care if kids get the XO so much as that they get laptops.

So what happens now? Nothing different. We're sort of unemcumbered, so we can move forward with clarity, to be honest with you.

But isn't it always going to be prety tough for a small organization of 30 people to compete with this giant company? Well, 30 isn't the right number. There are 2500 people worldwide working on open source software for the XO, and about 30 just at Brightstar doing sales, marketing, and logistics.

So how would you characterize the current status of the project overall? If there were no big surprises or major changes, we're headed to doing 2-3 million units in 2008. I believe we'll have about 20 countries up and running. If we were to follow just the pull of the market we would be very focused on Latin America, because in the scheme of things those countries aren't that poor. So we have to work very hard in Africa and Southeast Asia, and in India and China separately because they're so different.

Are you still confident you can sell to countries like Nigeria which have equivocated? [It said it would order XOs then officials said the government might purchase Classmates instead.] Why not? In the political process what happens is people make statements, but they're really not backing away from the concept.

What is the final tally of Give One Get One? 162,000, for $35 million.

Is that more than you expected? It is and it isn't. It's stunning to do that. On the other hand it doesn't quite create an economic model which could run the whole thing. If we had done a million units with G1G1 you could then maybe say the $100 laptop becomes a zero dollar laptop. So it didn't do that well in terms of the economic model to go forward.

Does that suggest you think you aren't getting enough uptake from the countries? No. Peru is really our star because they really understand constructionism.

You mean the pedagogic theories of self-instruction embodied in the XO software? Yes. In fact in 1991 a Peruvian educator visited me at the MIT media lab and I introduced him to Seymour [Papert, the educational researcher who has been deeply involved in OLPC], and he was very taken with Seymour's theories. So he went back and sent several people to the U.S. to study those theories. They went back to peru in the early 90s, and this man who started that work has recently become the Minister of Education. And several of the people he sent to the US are in the ministry working with him.

And other countries? Uruguay is close behind but from a slightly different angle. The people running the program there are in the government-owned high-tech research lab, and the telephone company is owned by the state. So we've got very good partners in technology. The emphasis there is on technology. The emphasis in each country is very different. If I have questions about the mesh network [the wireless way of connecting XOs to the Internet] I call Uruguay. If I'm worrried about the children learning to program at a young age, I call Peru.

Tell me more about what happened with Intel. They say there were philosophical differences. Have they explained those to you? Philosophy is a big word. I don't think it's philosophical. I think it's rather simple. When I questioned them about selling laptops directly, Paul Otellini himself would say that one size doesn't fit all. And we agree with that, of course. That wasn't the issue. They cannot compete with OLPC and be a partner. I think they violated their fiduciary responsibility as a board member constantly.

How have the other partner companies respond to all this? AMD deserves a prize for being big and going the last mile for welcoming Intel and giving them every benefit of the doubt. And nobody on the board including me wanted to throw Intel out. And Paul Otellini didn't want to be thrown out. So we tried, but what fell apart at the end was maybe they found it impossible to deal with me, but we really didn't make very large demands. And they couldn't see their way to meeting any single one of them. For instance, I'm giving a keynote next week at the Consumer Electronics Show, and Paul is as well. So I said let's each make reference to the other in our speeches. They said no, to such a small thing. It wouldn't have taken much effort.

You told me back when you got together with Intel that it had happened partly because your brother [John Negroponte, Deputy Assistant Secretary of State] had told you he thought the acrimony between you and Intel was harming your cause. Have you talked to him this time? I did, a couple months ago. I said it's not working that well, John. And he said if it's not working, then terminate it. If you look at the series of incidents, they should have been thrown out a long time ago.

But in the end they quit? They were on probation. They had violated very serious things. If you're in school and you are on probation for very serious misdemeanors you can say you quit but ....

Were they prohibited from attending the recent board meeting? No, but everybody was relieved they didn't come. The conversation was about Intel and the complete rollout plan for 2008. At the end there were specific things I was asked to speak to Intel about, and I did.