Audio Files & Securities Technology: The path to digital dominance
Over 140 years ago, Thomas Edison created the phonograph in 1877. It was first device created to record and reproduce the sound of music.
The quality of the recording was particularly bad and the recording would only last for a single playback. Within 10 years, Alexandar Graham Bell and his Volta Laboratory had solved some of these issues with their invention of the graphophone — a device that allowed for multiple playbacks.
The graphophone used a wax cylinder that empowered more frequent consumption but each cylinder had to be recorded separately so mass production was nearly impossible. Eventually, Emile Berliner used glass records (sound information etched into a flat disc that has vibrations read by a needle arm to produce music) to increase scalability when he invented the gramophone, but the listener had to wind up the arm crank because there was no electricity.
Over time, electricity was created and there was no longer a requirement for winding up the gramophone. Then someone started making the records out of vinyl plastic instead of glass. This made the records more durable, but also allowed for more efficient mass production.
Then in the 1950s and ’60s, magnetic tape sound-recording became the focus. First with the 8 track tape and then eventually the popularization of compact cassettes. The cassette tape continued to make music recording more scalable, while reducing the barrier for more people to listen to music (lower cost, more mobile, better user experience, etc).
This new technology carried music into the 1980s, when eventually Philips and Sony introduced the compact disc — a digital optical disc for data storage (first for only audio and eventually other data formats as well). Again, we saw better technology increasing scalability and reducing barriers to entry for a global audience.
The popularity of CDs lasted from the 1980s until the early 2000s, when we started to see CDs being displaced by different forms of digital audio file storage. It took almost 15 years for the new digital formats and interfaces to takeover, but in 2014 revenues from digital music services finally matched their physical format competitors.
Last year, over 140 years after the invention of the phonograph, global music streaming revenues topped $7.4 billion. Audio file technology has constantly evolved over time and required the consumption interface (phonograph, record player, 8 track, cassette player, cd player, mp3, streaming) to change each time. Each tech evolution lasted ~15–30 years, brought increased production capacity, and decreased the barriers of participation for a global audience.
Tradable Securities Are Evolving
We are seeing a similar phenomenon play out with tradable securities.
The concept of ownership has existed for centuries, with the idea of written record (certificated securities) being traced back to some of the earliest days of human history. These certified securities were informally traded in peer-to-peer transactions until the 17th century.
In 1602, the Dutch East India Company created what would eventually become the Amsterdam Stock Exchange, in order to buy & sell its physical stocks and bonds. This is the first known record of a fully functional securities market (as we think of it today).
Market participants used certificated securities (physical paper) for the next 300+ years, including a process called “open outcry” where brokers yell bids and asks at each other to reach agreement on transactions.
This nonsense became less popular with the advent of electronic trading. NASDAQ, the world’s first electronic stock market, was founded in 1971 leading to a more efficient system that wasn’t dependent on physical location.
Over the last 40 years, securities markets have become fully electronic which has reduced transaction costs, increased competition / liquidity / transparency, and reduced spreads.
Just as audio file technology increased efficiencies and reduced barriers to entry, securities technology has done the same. The audio file format and consumption interface changed over time, but the idea of audio files remained the same. Similarly, the idea of ownership has remained the same, but the proof of ownership format and consumption interface has continued to evolve over time.
The last 15 years saw audio files make the leap to true digital dominance. With the advent of blockchain technology, expect to see securities follow a similar trajectory to digital dominance over the next 15 years.
History proves that betting against technology is usually not a good idea.
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