Note: This is an extended, online-only version of the Q&A that appears in the August 18-25 issue of BusinessWeek.
Q: Many tech companies have cut research and development spending because they believe the industry is slowing down. You haven't. Why?
A:What has happened in technology over the last few years has been about the downturn, not the future of technology. A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of [customers], they would continue to open their wallets. And that's what we've done. We've been turning out more new products than ever before, and Apple (AAPL ) is one of only two companies making money in the PC business. We're not making a lot, but other than Dell (DELL ), we're the only one. Others are losing money -- a lot of money.
Q: Where has Apple been innovative?
A:Look at the iPod [digital music player]. We sold over 300,000 iPods last quarter. Just to put that in perspective, we sold about 750,000 overall units -- so if you look at each of those iPods as a $400 computer, that's a 40% increase in our volume. And it's a whole new product category.
Q: Are you concerned that your peers lack fresh ideas?
A:I look around, and I'm pretty stunned at how many successful young companies I see. I look at eBay (EBAY ), and I'm amazed. I look at Google, and I'm amazed. These are some pretty good companies in the making, and they're not just one-product companies -- they're real companies. They're already bigger than some of the great entrepreneurial companies of the past. So I think a lot of people got miscalibrated because of the Internet boom.
The rate of innovation now is not significantly different from what I've seen over the last 20 years, if you take out the Internet craziness. I see a recovery in innovation coming out of this downturn. I see some very strong companies that have been built even in these very tough times. And I see some new sprouts popping up out of universities. I'm an optimist.
Q: Apple has had early success working with the music industry to create its online music store, iTunes. Do you think the music industry is correct in taking legal action against its customers who pirate music over the Internet?
A:Stealing music is not right, and I can understand people being very upset about their intellectual property being stolen. But the stick alone isn't going to work. So we're working on a better product.
The music industry is based on selling unprotected CDs that can be read on CD players that are as dumb as a rock [and can't detect pirated music]. The right solution is to compete with the KaZaAs [music sharing services] of the world and to beat them. And that's what we're trying to make happen.
Q: Will we see more groundbreakers like the iPod from Apple?
A:The iPod is not a new category. Music is not new. It's not a speculative market. It's a very, very large market. It's been around for thousands of years and will be around as long as humans exist. So it's not like saying we're going to go build an information appliance or some technical curio and hope the market exists. We're taking a giant market and bringing it into the Digital Age. That requires hardware, software, and the ease-of-use talent that Apple has.
Q: Do you agree with [Oracle (ORCL ) CEO Lawrence J.] Ellison's belief that the high-tech industry is maturing and ripe for consolidation?
A:I know Larry has said that a lot. If you look at the history of technology, there has been consolidation in some parts of the business at different times. There has been consolidation in semiconductors, in mainframes, in minicomputers, and in other areas. But that never seems to stop new areas from popping up. And they can pop up in small companies or medium-sized companies or large companies. And while everyone likes to point to the Internet, you don't have to go that far. Look at the video-game market today compared to a decade ago.
Q: Will Silicon Valley be as much the center of gravity of tech in the future as it has been in the past?
A:It's the beehive effect. To turn really interesting ideas and fledgling technologies into a company that can continue to innovate for years, it requires a lot of disciplines. Sometimes the spark is some students in a university. But it has to be surrounded by venture capitalists, people with management expertise, and others. A lot of skills are required.
And if you're trying to convince someone to join your company, it's easier to convince them to wake up and turn left out of their driveway, rather than tell them to move their family to Boise, Idaho. That's why the car business is centered in Detroit and why media is centered in New York and Los Angeles. I don't see that changing. The infrastructure is here to take those new ideas and rapidly help them grow.