Auditing IT Systems

Company IT systems are now becoming larger and more complex and as this process continues, the tasks undertaken by the auditors have changed significantly. Most sizeable organisations have adopted technology which allows them to be ‘online’ in some form at all times, with many employees able to access and update important parts of the system (see my post on ERP systems as an example). Although this improves the operating efficiency in the business, it does provide opportunities for data to be manipulated or entered incorrectly, and programs to be altered to aid fraudulent activities. This is why it is imperative that the internal and external auditors carry out procedures to check not only the numbers produced by the system, but the system itself.

Due to the increased emphasis placed on internal control evaluation to comply with the Sarbanes-Oxley Act (2002), section 404, auditors for multinational companies have to perform a more intricate IT audit. They have to take issues such as administrator access, data entry procedures and system security into account, and in some cases, computer forensics will be required. There are three types of audit to assess the reliability of information the company presents to the auditors: the systems review audit, the data review audit, and the program audit. The first is used to make a judgement about the risks inherent in the company IT system and involves consideration of operating systems, networking and hardware. The data audit is employed to try to discover any errors in the data itself, ranging from entry mistakes to fraudulent activity. Finally, the program audit is used to determine if there are any faults in the procedures which IT systems perform, for example multiplying instead of adding figures (more complex procedures would normally be examined). Michael Sneddon describes these three audit types in more detail in his weblog, accessible here.

What is important is that it is much easier for insiders to commit fraud using IT systems than external hackers as they will often already have access to passwords and know how the applications work. This makes it more difficult for auditors to detect wrongdoing however Laura Stewart reports in her weblog that she has found big accounting firms now have technology to detect hidden data which could have highlighted fraudulent activities.

I think that the main positive aspect of auditing organisational IT systems is that it saves the accountants going through masses of paper to check the audit trail – the extent of this procedure is determined by risk and materiality therefore not all data is evaluated and the document highlighting fraud can be overlooked. In the past, if small discrepancies were discovered, it was difficult to determine if they were genuine mistakes or intent to defraud the company because the only evidence they had was the wrong number. By auditing the systems, they can catch discrepancies at the source and this can lead to a speedier detection of fraud or faulty procedures, in a sense, being more proactive. I definitely think that auditing the system is better than following the audit trail but I do believe that a balance has to be struck in order to provide the opinion that the information presents a true and fair view of a company’s performance.

XBRL

XBRL (eXtensible Business Reporting Language) is an XML-based language which allows business information to be electronically communicated more easily than through other available formats. Originally, the development of XBRL was undertaken by The American Institute for Certified Public Accountants (AICPA) but a new international not-for-profit consortium made up of large companies, professional service organisations, accounting bodies and government agencies has now adopted the project.

The primary aim of XBRL is to enhance the efficiency and effectiveness of exchanging and analysing business data by improving reliability and making it easier to update. It uses standard tags which are always assigned to a piece of data (e.g. Net Income), even if it is altered, in order for other databases to recognise them and use the figures. The following is a summary of the potential for using this language, and more detail can be found on the XBRL official website.
· Company internal and external financial reporting
· Business reporting to regulators e.g. tax and financial authorities and governments.
· Filing of loan applications
· Exchange of information e.g. between government departments
· Providing a standard way of describing accounting regulations
· It can organise a wide range of other financial and statistical data which needs to be stored, exchanged and analysed.
· Readily available information

Advantages
There are many benefits in using XBRL technology for all of the stakeholders. The companies themselves would see a significant drop in the amount of data entry performed by employees as the information only needs to be recorded one time and can then be used for many different purposes. Because XBRL is open-architecture technology, it can also cope with different accounting standards so there is no requirement to enter different data and prepare country specific reports for a multi-national company – it can adapt to the differing regulations and languages when needed. Another advantage from an internal organisational perspective is that it is free to use and can normally be integrated into existing software.

Auditors will also see many advantages if their clients use XBRL as it will allow them to perform accurate data searches and analysis more efficiently and reducing the time taken to do all the necessary procedures for an audit will subsequently reduce the fees (some auditors may see this as a disadvantage however, I am basing the argument on the fact that they would spend less time on each audit therefore be able to take on more clients).

After the increased number of business scandals in the recent past, many investors are concerned about the transparency of financial information and compliance with current regulations (e.g. Sarbanes-Oxley, IFRS). XBRL can be used as a way of allowing investors continuous access to correct information through the company website and perform their own analysis – many software applications such as Microsoft Excel are now compatible with XBRL so the data can be downloaded at any time.

Disadvantages
As with all new technology, there are some disadvantages to implementation. The main issue is security as it would mean that many companies would have to use better software to protect their financial information from being accessed and changed without permission. If the information is considered to be more reliable than before, regulators and investors may place too much emphasis on it however, there is still an opportunity for the data to be manipulated by company management. Another problem is that if the data is accessible at any time, there is greater need for it to be accurate at all times otherwise it could prove to be misleading and the company could find itself in court. Finally, there may be a high implementation cost for some companies if they do not have up-to-date technology or web presence however, I think that many organisations, particularly the large multi-nationals will have adequate systems in place for XBRL to be integrated with.

Conclusion
Currently, XBRL is not used as frequently in the UK as it is in the US because it is still moving from the development stage to practical use. I feel that with the continuing globalisation of business, all organisations should be striving to use the technology in the near future as there will be significant cost benefits due to the reduced printing of country specific reports. The developers of XBRL are continuing to make technological advances and new products (updates and add-ons) are always on the horizon.


Reference

Hannon, N.J., (2005), “XBRL GL: The General Ledger Gets Its Groove”, Strategic Finance, Montvale: Sep 2005, Vol.87, Iss. 3, pp. 57-59.

E-learning

Using IT as a means of teaching has been used for many years now but I still feel that there is more potential for this method and that many organisations are missing out on an opportunity. Many people all over the world now have access to the Internet and know how to use it, and there are now more efficient ways of uploading and downloading material. The fact that anybody can access a website from any part of the globe providing they have the right equipment means that organisations can sell their products (education) online to a much larger consumer base, therefore making larger profits.

Many businesses such as Scottish Power have used IT for staff application training and can often be found on a company’s Intranet. More recently, organisations have provided password protected online tutorials so that staff can use the facilities at home without it infringing on their productivity during working hours. Scottish Power now uses an excellent external website for training people in many useful business activities, from using Microsoft Office to advising on interview techniques. The government is also promoting online learning through the learndirect programme which was developed to help those who left school with little or no qualifications.

Another area where e-learning is becoming more prominent is in education. While I was at secondary school, we only used our textbooks for revision or bought additional study notes if we felt we needed additional information. Now, my younger brother and sister make use of BBC Bitesize which allows you to read notes applicable to your syllabus (Standard Grade, Higher, GCSE etc) and then test yourself on knowledge of the specific subjects.

However, I feel that the Internet should be used more frequently in delivering education and think that it would be of particular benefit to further education establishments such as colleges and universities. This has already been implemented by some universities to varying degrees of success: the University of Maryland is continuing to grow in numbers; however the UK government’s response to the increase in virtual learning, the e-university, collapsed after only attracting 17% of their target number of students. One UK success story is the Open University which has managed to adapt to the new technology available – it was originally a post-based institution but now uses the Internet to great effect. The University of Strathclyde does use the Internet for some courses as I found out last year while studying abroad in Canada. I had to complete one full class using material on the website which I found to be a good way of learning – I only had to email the tutor if I had any problems with the coursework. My only concern would be that skills such as teamwork and presentation delivery would suffer as a result of less human contact and these are still an important part of business.

It has been proven, mostly by universities in the US, that distance learning does work so I do not see any reason for this not to be applied to the education needed when training for professional qualifications such as the CA designation awarded by ICAS. They currently offer much information about the training and past examination papers online however they do not seem to deliver any of the education over the Internet. This would be extremely beneficial to CA students as they often have a busy working life and it would be easier to do the work at a time and place that suited them instead of having to attend a course in an awkward location. Notes could be published on the website and if ICAS felt that there was a need for a visual delivery, they could video a lecture and the students could download it. It would also be costs effective for the organisation as they would not have to employ as many staff to participate as one person could provide the information for all of the students taking the course; and would not have to provide facilities to run courses. The American Institute of Certified Public Accountants (AICPA) has recently changed its teaching methods and curriculum to incorporate e-learning (Laura Stewart talks more about this) and highlights that this type of education does work and should be considered by bodies in the UK such as ICAS.


Bibliography

A Little E-learning is a Dangerous Thing
E-Learning Benefits
Future Direction of E-learning
US Universities Lead the Way in E-Learning
E-University Fears Ignored
Flogging a Dead E-university
£50m Bill for Failed E-university

Online Mapping

Online maps have been around for a number of years and have started to replace the traditional paper versions used for such a long time. Websites such as Streetmap and Get-a-Map offer the user a view of the area specified and can be useful for working out a route to an unfamiliar destination. Moving on from this, there are free websites which can plan a route from one destination to another and show it on a map (AA Route Planner and Mapquest). The main drawback to these particular mapping services is that if you wish to see an area which is just off the side of the map on your screen, the web page needs to be reloaded and if using a slow speed connection, loading the graphics is time consuming.

More recently, Google and Amazon have launched online maps which are Web 2.0b sites and are more user-friendly because you can grab and drag the map to see a nearby place. The underlying technology used in Google Maps is an Asynchronous JavaScript + XML (AJAX) Engine which is loaded in the browser and allows the user to interact with the application at the same time the server is processing information, independent of each other. This makes it appear that the application is working in real-time and is beneficial because the user does not have to wait for the pages to load, unless zooming in. These mapping services have also added photographs and satellite images to their maps, allowing the user to see an area properly, making it easier to plan a route effectively.

The latest piece of mapping technology offered is Google Earth which was launched at the end of June this year. A free version of the application can be downloaded, although there are more sophisticated versions available which cost $20 or $400 per year and provide GPS support, spreadsheet import abilities and tools for commercial use (there are other specialised capabilities at an additional cost). Google Earth is “a globe that sits inside your PC.” It allows you to fly to your destination, zoom in, tilt the image and search local information - the KML data exchange format allows you to see data points created by other users. The possible customisation is excellent - you can create your own placemarks and import KML files and see them displayed on the Google imagery. The application uses a mixture of satellite and aerial images (updated to higher resolution on a continuous basis) to ‘build’ the Earth and special areas of interest have been computer generated to show a better 3D view than the pictures could offer – see the Grand Canyon below!



A layers concept is also used so you can see hospitals, schools, parks, restaurants, 3D buildings and even crime statistics. You can plan a route using Google Earth using the search facilities but in addition to this, it will fly you along the advised route! As with most new technology, there are some drawbacks. Firstly, it is noticeable that it is only the USA and popular destinations such as Rome that have good enough quality images to see a realistic picture of the place – try Glasgow and you will see that the streets can hardly be made out. Secondly, older PCs cannot use the program as you need more modern operating systems (Windows XP or 2000), and does not work with all graphics cards. The final concern, recently raised by the Indian Government, is that the imagery and information provided is too detailed (e.g. parliament buildings and nuclear power stations) and could pose a threat to national security if terrorists decided to use it to aid in planning an attack. Google has taken this into consideration however they believe that all of the information is already available online in some form therefore a terrorist would have access to it anyway.

Google does not seem to divulge its business strategy and at first it is strange that their products and formats can be used and/or downloaded for free. The only reason I can see for this is that they intend to create a large enough user base in order to merit them charging a fee for advertising and mashups in the future.

I think that Google Earth is fantastic with the potential to be significantly better and used as the mainstream method for many purposes, personal, commercial and educational. However, at the moment, I still feel that it is more of a toy because of the low resolution pictures of most the world, and that the old services such as Streetmap offer me the information I want – a simple road map to print out. The advertising that is likely to be associated with Google Earth could become annoying for many people (a point shared by Andrew) but useful for others if they are looking for local information such as hotels or visitor attractions. Microsoft has launched MSN Virtual Earth in response to Google Earth but I do not think is nearly as good, although it does have 45-degree angle pictures which give a better sense of what building look like. I think that there is now little incentive left for businesses to print and sell maps because good quality maps can be obtained for free on the Internet and in many cases, offer more detailed information.

ERP Systems

Enterprise Resource Planning (ERP) is used by corporations to aid in the streamlining of many business functions, for example, manufacturing, logistics, inventory and accounting. They are implemented internally across an entire company and integrate all operations and production procedures into the one system. This is particularly advantageous when staff in one department need access to information in another department because if all information is in one system, they can just look at and update it without having to ask for it. As explained in Wikipedia, ERP systems are considered to be back office due to the functions they serve in the fulfilment process – they create an automated road map of the processes to fulfil an order but do not deal with the selling process.

In the past, many companies developed their own software to control their activities which was extremely costly. It was recognised that a number of businesses were using software for the same processes so now, ERP software has been written with specific industries instead of individual corporations in mind, thus reducing the cost. However, there are many additional costs incurred other than the software when implementing ERP for the first time – consultant fees, training, testing, customisation, data conversion – one survey has found the total cost to range between $400,000 and $300million, depending on the size of the company.

There is also evidence that the implementation is not always successful with many businesses facing horrendous difficulties. One of the main problems is that all staff have access to the system and can update information normally changed by employees in other departments. Data entry in general can be a huge issue as if one error is made, it flows through the whole system and can have dire consequences. Also, many staff in an organisation will have to be retrained but as seen in a significant number of cases, the staff are reluctant to accept change, meaning that the new system is not used properly or to its potential.

There are a number of providers for ERP software with the most successful being SAP, Oracle and PeopleSoft, however, Philip Carnelley, a research adviser at Hackett has stated that the it does not matter which you choose as they effectively serve all the same functions (FT, 9th Nov). The vendors disagree with this view: the senior vice president at Oracle claims that it “matters in terms of total cost of ownership and return on investment” (FT, 9th Nov) and a general manager with SAP claims that their success in doubling market share would not have been possible if there was no difference between the software. Nevertheless, Hackett does stick to its opinion and concludes that businesses now have more to important issues to face than deciding which system to implement.


ERP for Accounting Activities

One research paper presented in 2000 found that ERP systems have had little effect on management accounting procedures within large organisations. It seems that many companies are still choosing to run separate systems for activities such as budgeting and other more advanced management accounting techniques, although it did find instances where the use if ERP has allowed managers and accounting professionals to concentrate on analysis instead of the rigours of routine duties. I would be interested to see if five years on, this is still the case, that accountants still prefer the tried and tested systems already in place as one individual from software company Poornam stated: “ERP is a necessity for anyone who is interested in being competitive - and, perhaps, staying alive - in business beyond 2000.”


Bibliography

King, B. (2005) "Shock News: Why All ERP Vendors are the Same", Financial Times, FT Digital Business, 9th November, p.10.
The Liberations and Limitations of ERP-Systems for Management Accounting

RSS in the Accountancy Profession

Every morning, my daily routine consists of waking up, getting breakfast and then beginning my habitual process of clicking on each of my ‘favourites’ to check the latest news from a variety of websites on my laptop. Unfortunately, I’m still using a dial-up connection so this takes forever but when informed about RSS, I was ecstatic! No more waiting for graphics to load only to discover that I have no interest whatsoever in the article; I just have to go to one website where only the new publications from my favourite sites are shown.

RSS (Really Simple Syndication) is becoming an increasingly popular way of keeping up to date with all of the latest information on the web. Instead of going from site to site, struggling to remember all your favourite Urls, you can have customised information from different sources all delivered to one place – Dave Winer, one of the inventors of this technology describes it as “automated web surfing.” The only thing you need is a suitable newsreader or client (e.g. Bloglines) which are readily available on the Internet. Another advantage is that you can decide which articles are relevant to you and immediately discard the others. Although a great number of Internet users still do not know what these feeds are for, many websites and weblogs offer RSS streams which you can subscribe to and have done for quite a length of time.

RSS, developed during the 1990s, is a collection of technical standards for carrying information over the Internet with the data being prepared using Extensible Markup Language or ‘XML’ text format. Since being implemented in 1997, RSS has been continuously updated, with the current specification being RSS 2.0 although some of the earlier versions are still in use.


RSS in Accounting

I think it is quite odd that the accountancy profession has not seemed to adopt RSS technology as there are many benefits. Firstly, it would be a valuable tool for ICAS and the standard setting bodies to use as when the latest standard is to be implemented, or even if there is new guidance and clarification of existing standards, they could publish them using the XML format and users could be subscribed to these feeds. Another advantage for accounting firm staff is that they can keep up-to-date with the latest news in their specialised areas using a reader instead of ploughing through a whole newspaper or website just to find the parts they want - professionals are extremely busy and will not have time to surf the Internet for the information they require – it is much more efficient to use a newsreader and RSS technology. There are other ways of using this technology – internally, the professional accounting firms like their staff to share their knowledge and instead of sending emails or putting it on the Intranet, the staff could maintain a blog and those in their department could subscribe the RSS feed.
Alan Neilson has found an example of this idea on the PwC website however it does not appear to be in widespread use. Deloitte does have an RSS feed but it provides little information, and Ernst & Young provide one for the US but not the UK. I do think that the companies will eventually see the possibilities and gains in using RSS but I believe that they are currently falling behind as many businesses in different industries are using this as a way to pass on their news, and the accounting profession is missing a great opportunity.


Bibliography

How to Speed-Read the Net
Working the Web: Newsreaders
Bootcamp 299: RSS - A Better Way to Surf?
RSS Feed (Really Simple Syndication)

Increasing Outsourcing of IT-Intensive Functions

The need to cut costs while maintaining excellent quality in the business world has driven many companies to assess their in-house activities to identify if there is a possibility to outsource the non-core work and concentrate on core issues. Many companies now believe that knowing their consumer market and tailoring products for it are the most important aspects of running a competitive business and that everything else has the potential to be outsourced at a lower cost than if internal. This means that functions such as human resources, procurement, finance and accounting systems are being undertaken in other parts of the world and at an alarming rate - a 9.7% increase is expected this year (Phillips, 2005).

It seems that for companies to remain competitive, they need to focus on what gains them an advantage over their rivals and outsource as many activities as possible. I don't think this is a particularly good situation for employment in this country as specialist activities can be performed elsewhere, with one Indian businessman stating that anything can be outsourced “if it's the type of work that can be done over a wire.”

I do believe this comment is valid and we are already seeing many examples of this happening – some Indian companies now specialise in taxation laws therefore small and medium sized businesses who do not have their own tax specialists can ship the work abroad. I was surprised to learn that so many small companies are involved in this type of process – a small insolvency practice located in Glasgow scan many of their documents and email them to India where the information is processed, all at a lower cost than would be possible here. Along with the lower labour costs, the decreasing cost of communication is one of the main reasons outsourcing is a viable business strategy – instant messaging can be free, and long-distance telephone calls are continually falling in price.

An alternative take on the reason for executives choosing outsourcing is that after recent financial scandals, companies do not wish to perform activities that may lead to future legal action and damage their reputation. This had led to a drop in the number of applicants to universities in affected subjects in the US, particularly Information Technology where there are many opportunities to outsource the work to India where the education on this topic is often more advanced. I do not think we will see the same trend in students applying to UK business schools, at least not in the near future, as I think the courses will be tailored to suit the needs of the companies recruiting the graduates in this country, and there are still many job opportunities in the UK business/service sector.

It never actually occurred to me that outsourcing of professional functions like tax calculation was feasible but I now know that almost all jobs in the service sector are at risk. Peter Cappelli, a director at University of Pennsylvania has stated that any service which can be considered a commodity has the potential to go overseas – some believe that the audit is turning into a commodity so will it be outsourced? This may affect my future career choice within the accounting profession – at the moment I cannot see an opportunity for forensic accounting to be outsourced as it often involves on-site work, however, I will not disregard this possibility.


Bibliography

Phillips, S. (2005) "Businesses Think the Unthinkable", Financial Times, FT Digital Business, 5th October, p.9.
Offshoring’s Ills
Outsource, Don’t Abdicate
The Future of Jobs and Innovation
Now, High-Tech Work Is Going Abroad
Offshoring fears hit US college computing enrolments
Merely Following a Megatrend

Growing Popularity of Instant Messaging Within Businesses

A recently released US survey (AOL’s Instant Messaging Trends Survey) has found that there has been a 19% increase in the use of instant messaging over the past year but what is more interesting is that there are now an estimated 28 million business users. It is clear that instant messaging is now making inroads to communication in the workplace. Originally developed for the consumer market, businesses have now seen the potential for quick contact between employees and are now using these services, with or without authorisation of their IT departments. It offers users the option to transfer files, share specialist knowledge and determine a user's 'status' i.e. if they are online, busy, or unavailable.

Microsoft have taken notice of the interest in this form of software and are now to include this kind of technology in their next version of Office. They are also looking to the future and believe that real time communication is the way forward, with voice and video calls among employees, individual calendars and locations likely possibilities.

This type of technology will be of particular use in large multinational corporations where time zones are a problem and local knowledge can be paramount to certain projects. Imagine, sitting at a computer in a UK office, realising that you need to talk to somebody with specialist knowledge of a project in Asia - you can look them up to see if they are online for a conversation where you are likely to get an immediate answer, and if not, you know that email is a better option.

However, I feel that there are many disadvantages of using this technology in business, particularly when using it for contact with clients. AOL’s survey found that many people have used instant messaging to avoid difficult face-to-face conversations but I feel this could lead to further problems. It is well documented that interpretation is mostly through physical expression and tone – words are ambiguous and when only seen in written form, and can give the wrong impression and therefore have a negative effect on client relationships. Three out of four users of this type of technology claim that it has had a positive effect on their working lives but they also say that they use it to contact home to check on children so this may in fact reduce their productivity if they constantly use it to attend to personal issues. There is also the reliability of the service to consider – Internet connections are likely to be disturbed at some point (has happened to me in every job I have had) meaning that contact can be lost at precisely the wrong time if making an urgent business decision.

Another of the drawbacks is the security issues, especially when using instant messaging to send important, sensitive or confidential information. Even if password protected, there is always an opportunity for viruses and hackers to get into the network and cause havoc, from destroying the system to stealing and passing on information.

I do know of at least one professional accounting firm that already uses this type of communication to great effect as they rely on sharing their employees’ intellectual property - it is often more convenient to receive a typed message rather than a phone call as you do not need to reply immediately and there is less likelihood that you will find yourself having a personal conversation instead of doing work.

My personal opinion is that instant messaging will never become the preferred method of communication in the workplace. I do like using the free applications offered online such as MSN Messenger to keep in touch with my friends who are gradually dispersing all over the world because this option is much cheaper (no cost once you have a computer and connection) than a phone call. However, I think that social interaction is a major part of all communication, particularly in stressful business settings, and even a phone call is better than instant messaging, although a meeting (or video conferencing) would always be the preferred method. Maybe there is scope for use in informal situations at work, for example, to clarify the time of a meeting or to check if a colleague is in the building – anything where there is a simple yes or no answer, but I do not think it should be used when giving advice or making decisions.



References

Pritchard, S. (2005) "Messaging Spells a Revolution", Financial Times, FT Digital Business, 5th October, p.6.

Podcasts Catch Yahoo's Interest

Yahoo have now launched a website allowing users to search for and listen to podcasts - audio files which can be downloaded and used on portable music players. This is a relatively new disruptive technology and a trend which has still to turn into a global craze such as downloading music, and Yahoo hopes it has entered the market at the optimal time with a website solely for podcasting. The online company is also intending to launch its own tools in the future which will allow people to make and upload personal podcasts.

Some businesses are already using podcasting to reach their users, for example, the BBC upload radio programmes so that their listeners can download them at a later date if they have missed the live broadcast. I think this kind of technology will allow people to upload and download more specialised audio programmes, not unlike the long tail idea where it is profitable to sell 'niche' items as there is little cost of storage for inventory, although it would be the cost of production rather than inventory storage in this case.

One of the best features of podcasting is that an RSS feed can be subscribed to and the programme will automatically be downloaded to a specified place on your PC – one way to describe it is like an audio weblog. This means you can remain up-to-date with all your favourite topics, no matter how specialised they are, from professional business conferences to the Top 40 music chart show. One of the advantages for the users of podcasts compared to streaming is that the speed of your Internet connection does not affect the quality of the broadcast because the file is downloaded in full and can be played at a later date.

Something I think could be a problem in the future is that this is an opportunity for people to record and transmit private conversations without the consent of the individuals involved. Obviously, if a situation is that sensitive there would normally be high security to prevent this but I do think that there are circumstances where this could happen and embarrass well known public figures, as has already been found with mobile picture technology. For further information about all of the benefits and drawbacks of podcasting, see Rachel’s post.

I think that radio channels may need to consider how to use podcasting to their advantage because as this technology becomes more widespread, it is likely that people will download the programmes instead of listen live. There is also scope for creating broadcasts on more specialist topics because demand will be higher if the file is always available as people in other countries will have access and those who missed the live show can listen later. The radio broadcasters would probably have to devise a charging mechanism in order to make this profitable but the other problem is that they will also find they have increased competition from individuals who want to make their own views heard.

Finally, it is not only audio programmes that are distributed using this method – text, picture and videos can also be downloaded, and with the introduction of mp3 players with video playing capabilities, there is potential for all sorts of media to be podcasted.

Will Publishing Follow the Music Industry?

The music industry has recently seen a vast change in the type of products consumers demand, from physical items such as CDs, to digital downloads, and it looks as if this digitisation may hit the publishing sector in the near future. Yahoo and Microsoft have now announced plans to develop a freely available online archive for books, audio, video and music while Google Print has already begun scanning books, although the company has become embroiled in legal wrangles over copyright issues. The current idea is to make their archives searchable and provide a short excerpt of a book in order for the user to assess its suitability for their purpose, hopefully leading to the sale of a copy.

It seems that Yahoo has overtaken Google in the race to digitise by deciding to publish copyrighted material only with permission of the holder and hopes that the 18,000 proposed works will be online by the end of next year. In contrast, Google has decided to publish all works from selected universities unless objections are received, causing The Authors Guild to take legal action which subsequently halted scanning of copyrighted material for a short while. At this point in time, texts that are protected by copyright will not be scanned in full but in the future, I think these companies will offer whole books online for a small cost, with a proportion going to the publisher and author.

Currently there are only plans for including American literature and content from Britain's National Archive and the European Archive to be decided by them in due course. However, with many other websites continuing this trend, the content made available on the Internet to view, download or print will become extensive and there will be no market for hard copies, making the high street retailers redundant (Keh, 1998). Nonetheless, questions relating to digital rights management would have to be answered before this is implemented, for example, if one person can download a book, is it acceptable to print ten copies and distribute them to friends?

Following on from these plans, Google is proposing an online rental service whereby people would be able to read books on the Internet. A title would be available for up to one week at 10% of the retail price and customers would not be able to save or print them, however, Google has not confirmed this project so the information is currently only speculation. This proposed rental scheme is likely to prove successful because many people do not want to read a book more than once (unless for reference) therefore an online library presents a good solution.

As an aside, I would like to mention the publishing of sheet music as I find what has happened quite interesting. There are now many websites such as Musicnotes.com which offer sheet music to download and print for a relatively small price, but it is unfair to sell these without providing a preview as customers often cannot determine the difficulty of a piece of music without seeing it first. Currently, the websites offer the first page - a reasonable method for classical music but for pop music, which is simpler and mostly based on repetitive chord patters, I find the first page gives enough information to work out the whole piece. Obviously, for less experienced musicians this will be more difficult however I do think that this will prove to be an impending problem for online sheet music distribution.

Back to text based publishing: in the future I think that most publishers will eventually have to give in and start using the Internet as a distributing tool for new titles. This will likely mean a significant decrease in prices for consumers as there will be fewer production costs for companies, therefore the publishers will have to decide how they are going to profit from this. One way would be to allow advertising on their websites but this would only be possible if they had enough customers. It is possible that publishers will not have a future as authors may decide to publish on the Internet themselves – many people already do in the form of weblogs, but again, as with musicians, the question is how do they publicise their work to create demand for the product? This may be the only opportunity for publishers to survive and they would have to adapt their business strategies in order to offer a different type of service.

As for newspapers, RSS and online publishing are making sales plummet and I think that these companies will eventually place all of their focus on Internet based services. The issue here is not just that people are not buying papers, but that the companies are not getting revenue from selling advertising space. This is because job vacancies are now dealt with through Internet search engines and company websites, and demand for general classifieds have seen a decline due to websites such as Craigslist.

Finally, I think there will always be a market for genuinely rare and collectible used books, and the prices will be driven up by the global transparency that the Internet offers. Buying hard copies of specialised material at high cost (e.g. academic textbooks) may be a thing of the past - at least I hope so!


Bibliography

Keh, H. T., (1998), “Evolution of the book publishing industry Structural changes and strategic implications”, Journal of Management History, Bradford: Vol.4, Iss. 2, pg. 104

Long, S. A., (2003), “The case for e-books: an introduction”, New Library World, Vol. 104, Iss. ½, pp.29-32.

Milliot, J., (2005), “Searching for Digital Dollars”, Publishers Weekly, New York: Oct 31, Vol. 252, Iss. 43, pg. 12.

Disintermediation in the Music Industry

Global digital music revenue has increased threefold in the first half of 2005 compared to the same period in 2004 and is showing no sign of slowing due to the growing popularity of (legal) downloading. This disintermediation, cutting out the high street retailers, means consumers pay much less and businesses do not need to pay costs for shipping products around the world. At the moment there is still a market for the physical forms of music such as CDs however this is shrinking as record companies are focusing on the digital market and fighting the battle against piracy.

Digital music, a form of disruptive technology, seems to have sparked a worldwide trend of downloading music and as consumers are now investing in home computers and broadband Internet connections, it is much easier to obtain the songs requested. The popularity of digital music is also allowing disintermediation to a greater extent where the record companies are cut out of the equation because it is possible for artists to set up their own websites to promote or sell their songs. This is not good news for the record companies and it looks like they may be facing a difficult future.

What I find interesting is that at this point in time it seems to be older generations that are downloading their music more frequently than younger people, who I expected to do it due to a better grasp of technology. I think the reason for this is that the search facilities offered online make it much easier to find less popular or older music which may not always be available in the high street stores. The search facilities probably also encourage ‘impulse buying’ which is something I think online stores can benefit from – people will see more options and may download out of curiosity and when the music is selling for pennies, they will not hesitate to do so.

Eventually I see the future of music distribution being done almost solely over the Internet because there is such a large price difference for consumers. I think that instead of taking file sharing websites and the general public to court, the record companies should focus on how they are going to capitalise on this new form of music distribution and rethink their business models. The fact is that the technology is already here and there is much potential to profit from legal downloading in future. I am sure the management of the record companies will find a solution that enables them to remain an important factor in the music supply chain – probably more to do with publicising their music acts and concert tours. They could set up their own online store to sell their contracted musicians music and at the same time also gain money from allowing advertising on their website, as long as they have enough customers downloading. I do not think that individual bands will be able to sell music on their own websites, at least not until they are well known and that is why I think record companies have a future – they can promote bands from unknowns to superstars and it is only then that a band could offer music on their own websites.

As for the high street retailers, I think that they will have to change the type of products they sell and also invest more in online ventures to enable them to continue in business. However, if the record companies start to offer music on their websites, this may be extremely difficult and it may be the end of the road for traditional music retailers.