Highlights from groundbreaking research on the impact of APIs, plus 6 key takeaways for business leaders embarking on an API-driven strategy.
Application programming interfaces (APIs) are how valuable software and data in one system can talk to valuable software and data in another system, repeatedly and at scale. This makes them key mechanisms in how value gets exchanged in digital economies, with developers assembling APIs, like building blocks, to create modern apps, let those apps communicate, and combine them with cloud services. This all makes APIs among the most valuable IT assets an enterprise manages. How valuable?
Throughout the second half of the 2010s, Marshall Van Alstyne, Boston University professor and research associate at the MIT Initiative on the Digital Economy, was among the first researchers to tackle this question. He published a number of articles on business platform strategies, including research that showed over a four-year period that firms using APIs saw 12.7% more growth in market capitalization compared to those that did not adopt APIs.
This research helped explain why API-first strategies, and the API management industry, were growing so rapidly. APIs allow access to a business’s most valuable data and functionality which means companies can more efficiently reuse internal capabilities, share assets, and co-innovate with partners.
The research was ground-breaking—the first to put a value on the adoption of APIs as the standard means of allowing software to interface with other software. When Van Alstyne shared that he had been working on an update to the research that shows APIs create even more value than previously demonstrated, I had to talk to him.
“We extended the study,” said Van Alstyne, in an interview, “and found that there was 38% growth over a 16-year period. So, the gains continue. We also created synthetic controls for non-adopters of APIs. We found they lost market share comparatively. The gap gets wider over time.”
Many of the companies that have bought into the value of APIs also see the value in using an API management platform such as Apigee to manage them. API traffic for Apigee customers increased 46% year-on-year to 2.21 trillion calls between 2019 and 2020. And there is plenty of anecdotal evidence of success, too. Look at Daimler monetizing data as a new revenue stream, Schneider Electric’s marketplace, and ABN Amro’s ambitious program of embedded finance.
Related: Top 5 trends for API-powered digital transformation
Openness promotes growth
During our conversation, we talked about how such growth and reinvention is possible. We also returned to the notion of the inverted firm—an organization where the creation of value has moved from inside to outside, from employees to ecosystem partners. This idea is about value-focused, platform-based, API-oriented organizations—but first I wanted to understand what an API strategy means to him.
Van Alstyne offered two definitions:
First there is what he calls the “packaging and modularization” approach—API adoption that allows businesses to “reconfigure their resources quickly to mitigate problems, seize opportunities, or simply to perform technology upgrades. I see this as capital redeployment.”
Second is a “permissioned micro contracts” approach. “This allows third parties to access your internal resources, tapping those resources to capture innovation you hadn’t thought about.” Underscoring this approach is a new kind of partnership. “It’s much better than traditional copyright and patents.”
API traffic for
Apigee customers increased 46% year-on-year to 2.21 trillion calls between 2019 and 2020.
With the right API management tools, the “micro contract” allows relatively light-touch, self-service access to APIs while ensuring the necessary levels of governance and security. These management attributes are essential to making APIs work either across internal teams or with third parties.
The second approach to API adoption, much more than the first, nods towards openness. “APIs help define your openness [and] openness generally promotes growth.”
It’s foolish to host a dinner party to which nobody comes
Van Alstyne is also the co-author of Platform Revolution: How Networked Markets are Transforming the Economy – and How to Make Them Work for You. When I asked him why platforms and ecosystems matter so much, he began by offering another definition. A platform, he said, is “an open architecture with rules of governance to facilitate interactions.”
Expanding on the definition, he said: “Open architecture lets third parties in. Rules of governance is what motivates people to come, build, and create value. It also defines what they get to keep and what you get to keep. Interactions are what actually creates the value—whether you are taking a ride or reading a tweet.”
“Managers often neglect the governance. It’s foolish to host a dinner party to which nobody comes. You have to motivate people to come and join in.”
“A lot of these platform businesses are based on network effects, the way your system becomes more valuable the more people use it,” he said. “This leads us back to the inverted firm. And when you are an inverted firm, your strategies for running organization, architecture, openness, and monetization all change.”
All too frequently, technology is viewed as mere infrastructure left to a few priests to manage. That’s a big mistake because technology has such dramatic implications for the strategy of an organization.
By examining three cohorts—non-API adopters, those using APIs for internal configuration, and those using APIs to connect to the outside world—Van Alstyne found that only the final group made major gains.
Opening up to the outside world is perhaps the biggest business transformation we’ve seen in a generation. “Digital transformation has been around for decades—think of the shifts to client-server, the adoption of ERP systems, the move to the cloud. This is a bigger digital transformation than all of them. We are talking about a fundamentally different business model.”
Platforms may even have a role to play in the green agenda. “Platforms are especially good at tapping spare capacity,” noted Van Alstyne. “You can reconfigure resources to meet specific challenges and opportunities. This reduces waste so it lends itself to the sustainability agenda. If, for example, you use cars more efficiently, you need fewer cars. All excess, surplus production goes away.”
Related video: Getting started with Apigee API Management
Co-innovate to create value
Van Alstyne champions the role of the IT department working in collaboration with business leaders. “All too frequently, technology is viewed as mere infrastructure left to a few priests to manage. That’s a big mistake because technology has such dramatic implications for the strategy of an organization.” Whether you are an “inside out” organization—where your resources are available to third parties—or you are an “outside in” organization pulling ideas, data or resources from elsewhere, technology is central to the innovation opportunity. “Technology is strategy.”
Nevertheless, this requires more than technology adoption. It requires cultural change, too. “A shocking proportion of the change necessary is in the mindset rather than in the technology. In some ways it is easier to adopt the technology than it is to create a community around the technology.”
“The mindset problem sometimes comes down to looking at business outcomes in the wrong way. ‘How do we make money?’ is often the first question business leaders ask. It’s the wrong question. The right question is, ‘How do we create value?’. Especially in inverted firms where third parties are creating that value, you have to figure out what your contribution is. That requires a huge shift in mindset.”
“Once you figure out how third parties participate, you get the real benefits of an inverted firm. You get people you don’t know giving you ideas you don’t have. What follows is innovation and growth that was not possible when you were doing it on your own.”
Don’t fall for the “Build it and they will come” fallacy, and six other tips for business leaders
Before our conversation drew to a close, I asked Van Alstyne for some advice for business leaders embarking on an API-driven strategy. He offered six takeaways:
1. Create a symbiotic relationship. “If you are counting on people who you don’t know to bring you ideas that you don’t have, they are not going to volunteer resources freely. You have to give them value. If you take more than you give, nobody will want to join your ecosystem.” To get the most out of APIs it is essential you create an equitable environment. By sharing APIs, both parties can innovate faster and expose their brands to more opportunities than either could hope to achieve acting alone.
2. Anticipate bad actors. Making your services available to third parties can introduce risk unless you mitigate against it. “So, my advice: anticipate that there will be bad actors trying to take advantage when you open up. But remember: the opportunities far outstrip the risks.” (See point 4. on monetization). Companies need both better security and greater openness. API Management platforms like Apigee can play a central role in providing security capabilities to counter malign activities.
Related: Best practices for securing your applications and APIs using Apigee
3. Don’t fall for the “Build it and they will come” fallacy. It’s not true, said Van Alstyne. “You must motivate third party participation.” As such, organizations should create developer portals, run forums and user communities, and provide relevant documentation. Evangelism is critical to success—and API management tools can help put the infrastructure in place to make this possible.
4. Be smart about how you monetize data. APIs can drive direct and indirect value. Both are valid approaches but care should be taken when selecting the right approach for a specific use case. “If you charge for data, you may be putting friction on customer interactions—and you’ll end up with less data. It may be that the usage of the data could be more valuable in the design of network effects or in the selling of new services and products than in the sale of the data itself.” For example, a developer might combine mapping APIs, restaurant location APIs, and restaurant ordering APIs to let users search for nearby restaurants, browse their menus, and make orders all within the same interface. The company providing the store location APIs does not derive direct monetary value from the process, but it may enjoy indirect value in the form of increased customer engagement, increased ecosystem reach, and increased variety of ecosystem partners and participants.
Related: How APIs are shaping the future of retail
5. Use data to improve network effect design. “One person’s Google search makes another person’s Google search better; one person’s buying experience makes another person’s buying experience better. It cycles back into design of new products and services, fostering innovation that becomes more valuable through use. Traditionally products deteriorate through use. In this scenario they appreciate with use.”
6. Don’t think of this as just a product and services play. “Think of it as restructuring entire industries—channeling these value flows through the industry itself. Think big. Think of it as a way to reorder the universe with your products and services at its center. Once you understand platform orchestration and once you understand firm inversion, entirely new business opportunities open up.”
To learn more about maximizing the value of your APIs with robust management resources for security, monetization, and analytics, download our ebook, Succeeding in the digital economy.