Your take: Outsourcing is bad for the U.S. in the long term

When I played pool I was like a good psychiatrist. I cured ’em of all their daydreams and delusions.Minnesota Fats

Dear Vorticians,

I’m returning from Las Vegas, where games of chance other than billiards hold sway, and the Interop conference, where networking is king. This gives me the opportunity to get caught up with some recent letters that I hope you’ll enjoy – and I hope it serves to remind you how much I enjoy hearing from you. (Write me at jgallant@vortex.net.)

On my revisited rant on offshoring, I received letters that, again, spanned both ends of the spectrum on the issue. From Vortician Rich Janow I took a drubbing:

“Shame on you for spouting that tired religious dogma about the ‘free enterprise system’ being our greatest strength. Globalization helps a few people in non-Western countries (who I don’t care about) and hurts Americans (who I do care about, since my children will live here). It helps top executives at large firms meet short-term financial goals; it stifles innovation by raising barriers to entry for small firms that cannot initially operate in multinational mode.

“We, as a nation, are toast economically and militarily unless we hold onto technical and market dominance.  That means curtailing outsourcing, fixing the trade and budget deficits, using access to the North American market (the only consumer game in town) as a way to keep jobs and tax revenue at home, and rewarding long-range enterprise growth rather than greedy algorithms focused on next-quarter performance. Only regulation can accomplish these aims in an age of race-to-the-bottom competition.

“There is no new emerging industry on the horizon. When railroads were declining, autos were obviously on the rise. When the Pony Express was dying, telegraph and telephone were clearly the Next Thing. Now IT is mature and declining, but I don’t see a Next Big Thing. Biotech is hyped for such, but it hasn’t taken off yet and superstition in this country has ensured that progress in stem cell research will take place elsewhere.

“Any work that depends on cheap, skilled labor can be done more cheaply in Asia, where the labor supply is infinite. We cannot raise all boats to the Western living standard and grow markets when there is an infinite supply.  American living standards will sink to the Asian level, unless there is rebellion first. If executives continue to run away from their American roots they will shortly discredit capitalism.”

Rich, it’s a powerful letter, but you and I will have to agree to disagree. I care about those non-Western types, along with Americans. In fact, my hope is that globalization makes the world your children will live in safer by smoothing out some of the inequality and poverty. No Next Thing beyond tech? I can’t buy it. History doesn’t end with us, nor does innovation.

Vortician Bill McLaughlin also raised the issue of globalization, but in a different light.

“Protectionism has never worked. Look at all the great societies/empires in the past that have disappeared owing to their xenophobia. In my opinion, the larger longer-term challenge we’ll be facing is not the outsourcing of jobs, but rather how do we respond to our exportation of free-market principles, as they’re adopted in other countries. Eventually countries like China, the countries that make up the old Soviet Union (India already gets it) will embrace this philosophy and create an entrepreneurial class to rival ours. Then, when you consider their lower cost of living, we will have a real game on our hands.    

“So the question is where do we continue to invest to stay ahead? The areas I see are sciences, aerospace and defense. We have a clear lead in these areas and it’s hard to conceive of other nations catching up as fast as they have in commercial computing. Also, think how many of today’s commercial technologies actually stem from those segments. Hopefully, this doesn’t come off as too hawkish, but continuing to invest in these areas protects us not only physically, today, but economically down the road.”

Bill, I couldn’t agree more on your first point. Whether or not we like it, some very big countries are going capitalist and we face greater competition in the future. But that doesn’t frighten me. Americans and our economic system thrive on competition. Remember that Japan was supposed to have turned us to dust years ago. Instead, Japan’s growing aggressiveness proved just the kick in the pants the U.S. needed to get its groove back.

On the topic of service providers, Vortician Garry Williamson asked: “John, I notice you did not say anything about MCI. What are your thoughts on MCI? I might be doing business with them shortly in the wholesale market and was under the impression they were getting things under control.”

Garry, I think CEO Michael Capellas has done a pretty good job getting things under control and cleaning up a great deal of the mess in image, finances and operations at MCI. There’s still huge work to be done, but MCI has come out of bankruptcy with many of its customer relationships intact and a solid focus on IP-based services.

But that doesn’t mean I’m optimistic about MCI. The long-distance companies face lots of challenges, including loss of both consumer long-distance business and corporate accounts as the former Bells, like Verizon, get more aggressive about going after the business services market. Worse, MCI doesn’t have a wireless story and wireless is where it’s at profit-wise, these days. My bet is still that MCI gets acquired. I’d place my wager on a bigger, foreign carrier that wants access to the U.S., except regulators might not approve given the service provider’s government and defense contracts. (For another view on MCI, read on!)

Also, on service providers, Vortician Tom Nolle wrote: “Interesting questions and points in the last newsletter. Here’s my view. First, the basic services of ‘transport and connection’ that carriers provide cannot be differentiated. Bits are bits.  Further, in an age where unit cost of bandwidth is falling at the current rate, much less at the rate it’s likely to fall in the future, there is no chance that there will not be more than enough competition to assure minimal margins if carriers are forced to price competition. In that kind of market, the guy with the lowest internal rate of return (the one like a public utility, namely the RBOC) wins. 

“The solution for carriers is the same as it is for anyone in a commoditizing market-add features. In networking terms, that means climbing out of the lower three layers of the OSI model, which means climbing out of the traditional services of transport and connection. We always talk in the industry about ‘climbing the OSI stack’ but we ignore the fact that once you climb above Layer 3 (IP), you’ve climbed out of the network altogether and you’re now in the computing world. Computers, applications, add features to networks in the future. Nothing else does, or can.

“Will the carriers understand this? They do, in my view. I’ve talked to AT&T and MCI and both are quick to articulate their commitment to application services and even to the Web services or ‘On Demand’ architecture. Will they be able to act on their understanding? I think they will.

“We shouldn’t be too quick to judge AT&T by the failures of things like Net2000. They had the right idea but in an age where open, loosely coupled, distributed computing paradigms were just not available. That’s what distinguishes Web services, or service-oriented computing, from the other older architectures.  It’s also what opens the door for the carrier to be a provider of application services.

“Look at AT&T’s Web Service Connect. Users post applications as ‘services’ in a registry that can be either open to the public and partners (as for e-commerce) or closed for intranet use. Right now, the users themselves populate the registry, but what difference would there be if AT&T populated it with a few of its own hosted ‘services’?

“If Web services makes open client/server relationships possible, it opens client/server relationships period. The carrier, an essential facilitator in any network-hosted application, is a natural provider of such an application. They earn margin from both the communications and the application; third-party players like IBM earn application dollars alone. And does IBM sell hosted applications that collide with its sales of hardware or software? Carriers have no application software or computer incumbency to protect. I think they’ll do well.” 

Finally, regarding my piece on the rebirth of convergence, I got this note from Vortician Jeff Moore. “Great article on convergence!  I have one question though – how are you defining convergence? Convergence is a rather broad term that has been thrown around with glee for several years now to the point that its definition is so overly broad that it has lost meaning. Please define the context that you are using the term in.”

Jeff, you’re right on two counts: Convergence has been thrown around with great glee and I should have clarified my meaning. I used convergence to define a single network infrastructure that can support multiple traffic types – in this case, an IP network carrying data, voice and video. Thanks for keeping me honest.

You should all keep me honest by sharing your thoughts at jgallant@vortex.net.

Bye for now.