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Like It or Not, RFID Is Coming

The decision by Wal-Mart (WMT) and other retailers to require that their largest suppliers attach inventory-tracking RFID (radio frequency identification) chips to their products is creating a brand-new chip market -- one with a bright future. RFID chips, whose data can be grabbed by electronic readers, could one day hold all of an individual's personal information. In theory, that means they could displace credit cards, medical-insurance cards -- perhaps even wallets, predicts Scott McGregor, CEO of Philips Semiconductors, a division of Koninklijke Philips Electronics (PHG) and the world's No. 1 maker of RFID chips, which are also known as "tags."

If that comes to pass, RFID could also be an engine of growth for Philips, which now gets 5% of its $4.9 billion in annual revenue from sales of such chips.

On Mar. 15, McGregor talked with BusinessWeek Online reporter Olga Kharif about what he sees as the potential for RFID. Here are edited excerpts of their conversation:

Q: At this point, RFID technology is essentially forced by retailers on their suppliers, who often see few benefits in using this technology. How can you change that?

A: If you're tagging low-cost commodity products, RFID tags need to approach the cost of bar codes (they now cost at least 20 times as much). But for higher-priced or brand-specific articles, there's a lot of value in RFID for manufacturers. It can work as a proof of authenticity.

And for a lot of makers of sports shoes, RFID provides added benefit to customers. The average life of a sports-shoe model is about three months. Say that when your shoes wear out, you want a similar pair. It's incredibly difficult today for the retailer to tell a customer which new model corresponds to the old one. But we could fix that with RFID. That's a great sales tool.

Q: A lot of people worry that RFID will infringe on their privacy. Is that a valid concern?

A: There's a theoretical risk. But we have safeguards, and more are coming. Our tags have a kill function that will destroy the tag in case of tampering. There are ways to simply erase the information on the tag. There are also less high-tech ways to deal with this: When I buy a garment, one of the first things I do when I get it home is cut off the tags. You can cut off RFID tags the same way (see BW Online, 3/5/04, "Shutting Shopping Bags to Prying Eyes").

Also, privacy concerns around RFID tags are a little like concerns about supermarket scanners years ago. When the laser scanners were coming out, everybody was saying, retailers are going to collect information about what you buy. And none of that happened. I think the situation with RFID is similar.

Q: You mentioned that it's important to drive prices down. What should RFID prices be? Today, an RFID tag, depending on features, costs more than 20 cents.

A: If you sell a Rolex watch, whether the tag costs a cent or a dollar doesn't matter. But if you want to tag a can of soup, you need to get the price down to less than a dime. That would lead to an explosion of single-use applications. We already use our tags in tickets in the London Underground to help people check in faster. That's 2 million trips a day, so the price of RFID chips for subway tickets is really important.

Q: What other applications do you foresee for RFID?

A: Tracking individual items in stores. Medical identification: Your medical information is stored on a chip, so if you have an emergency and are in a hospital, doctors can read your medical history in a secure way. Use in payments: We're working with Visa, which will move from magnetic stripes to contact smart cards and eventually to contactless smart cards (they'll be scanned from a distance, vs. cards that have to be swiped).

You can also put RFID tags in movie posters and advertisements and use your cell phone as a reader to pick up information from the poster. You then go to a Web page or download the trailer of the movie -- plus find out when and where it's showing.

Q: How will RFID technology be used in mobile phones?

A: We're discussing with a number of mobile-phone manufacturers embedding an RFID technology we call NFC, for near-field communications. Then the phone could pick up information from various things, like movie posters, and the tags could allow you to do things like carry an embedded Visa card. You'll see trials of such phones in the U.S. this year.

Q: About your work with Visa: What's wrong with the credit cards now in use?

A: First, RFID offers increased convenience by letting you simply touch something with your card to facilitate a transaction instead of having to swipe the card through a magnetic reader. I'm constantly frustrated when I put a credit card into a reader and the stripe doesn't read or is demagnetized. Plus, contactless payments are cool -- and Visa, when it implements them, will be able to give customers a higher-end, interesting product.

Secondly, if you use magnetic-strip technology, you have to make the strip a certain size and shape for it to work -- it pretty much defines the size of a credit card. With RFID, you have complete freedom on the size and shape of the credit card. You can make it small, the size of a coin, something that fits on your key chain, something that's embedded into your cell phone. That's convenience.

Q: So what would the ultimate shape and size of the credit card be?

A: It's very simple: Credit cards go away in the future, and your phone becomes your credit card. In fact, most of the contents of your wallet go away. Because, if you look at all the cards you carry today, there's no reason you can't have that information secure and separate, stored as part of an RFID tag embedded in your cell phone.

RFID could replace your keys, too. Most car manufacturers we're talking to will have a card you keep in your wallet or embedded into your cell phone. You get in your car, push start, and the reader in the car will read the card in your phone to make sure you're the car's owner.

Or all this information could be embedded into RFID cards on your key chain or in your jewelry. Then, it would give you secure authentication and look nice. This evolution will be slow -- 10 years or 20 years, but you're already starting to see some of it today.

Q: It sounds like RFID will compete, in certain applications, with wireless technologies such as Wi-Fi (wireless fidelity) and Ultra-Wideband (UWB)

A: All of these technologies will be used for different applications, because they're different. Wi-Fi and UWB have very high data rates. They can transmit an entire book in seconds. RFID's speeds are very much slower [NFC is capable of transferring about a megabit per second vs. 100 megabits per second for some kinds of Wi-Fi], and the chip can store only, perhaps, a page of information at a time. You could, potentially, use RFID to transfer an MP3 file onto your phone -- but not a movie or a PowerPoint presentation. You would use Wi-Fi or UWB for that.

But RFID tags have inherent advantages. Chips that we make, for example, don't require a battery, and that makes them very portable. So when you see a movie trailer on your phone, you might buy movie tickets online and store the code that you must present at the theater as proof of purchase on your RFID tag.

Q: So I could use my RFID tag for data storage?

A: Exactly. For example, I might have a business card with an RF tag. If you put your phone, which has an RFID reader and tag, next to one of my business cards, you would instantly pick up the information from my business card (which also contains an RFID tag). I could also have my business card be my phone. We could put our phones together and exchange our information. It's an intuitive thing to do.

Our RF tags would allow users to store this information on the tags themselves or on their phones' flash memory -- the predominant type of storage on cell phones today.

Q: A lot of companies want to play in the RFID market. These chips are relatively simple. How do you differentiate your chips from those of other companies'?

A: At the low end, the primary differentiator is price. At the high end, it's more about features, such as security, encryption, protection from evildoers.

Q: What kind of things do people do to break into RFID chips -- and how do you prevent that?

A: They put them in cold liquids, bombard them with gamma rays, do what's called differential power analysis. Basically, they've noticed that the chip uses a slightly different amount of power if you get an incorrect digit than if you get a correct digit, and they try to break the code that way. They take the chip apart and try to discover the password on the logic components.

To counter that, we use temperature sensors and radiation sensors on our chips. We have all kinds of voltage protection, so they can't monkey around with that. The logic is randomly distributed. We have coding on the chip that's licensed from the CIA that's really hard to scrape off without permanently damaging the chip. We're the only company that can do high-level, triple DES encryption in a contactless RFID tag.

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