The emerging API economy is transforming the way businesses are built and operated

Richard Yao
May 31, 2018 · 9 min read
APIs are like the stubs on Lego pieces that enable different software to work together. Photo by Iker Urteaga on Unsplash

Helix is one of the several genetic testing startups that popped up over the last few years that aim to bring easy-to-conduct at-home testings to consumers for heritage and medical knowledge. Beyond its direct-to-consumer offering, the startup is also partnering with other companies such as National Geographic and Mayo Clinic to provide its genome testing service as something that they can integrate into their own products. In other words, Helix is positioning itself as a service to which other companies can outsource their genetic testing-related needs and use the results that Helix provides to create hyper-personalized products based on genetic insights into their health, ancestry, nutrition, and fitness.

In a sense, we could say that Helix has turned its business into an API that other companies can use to incorporate genetic data into their own offering without having to do all the heavy lifting of DNA testing and the resulting data management.

This is but one example in the growing number of companies that are seizing the opportunities in the emerging API economy that is transforming the way businesses are built and operated. Let’s take a deep dive into the definitions, the pros and cons, and the best brand practices of this promising business model born out of the digital era.

What Is API and the API Economy

For those who are unfamiliar with computer programming, an API (short for application programming interface) is an interface that allows different software components to communicate and share data with each other according to a set of clearly defined methods of communication. Like how you can build a castle out of various Lego pieces, you can build a whole service out of a bunch of different micro-services interconnected by APIs, which would be equivalent to the little studs on a Lego piece. A handful of successful startups have essentially built their entire ride-hailing business on top of a variety of APIs. in Lyft’s case, for instance, the ride-sharing company started by using API of Google Maps for navigation, Twilio for sign-up verification, and Stripe for payment.

An API allows partners, or any developer if it is open-sourced, to create application software based on the data that API returns. So, when a company offers an API to their partners, it basically means that they’ve built a set of dedicated URLs that return pure data responses , without the kind of presentational overhead that you would expect in a graphical user interface such as a website.

Digital payment company Square, for example, offers a payment and ecommerce API that small businesses and online vendors can use to easily create customized POS systems to handle both in-store and online payments, thus saving them the trouble of building a cross-channel payment solution from scratch.

The API economy, then, refers to the way application programming interfaces (APIs) can positively affect a company’s profitability, where the APIs enable businesses to either scale quickly by leveraging APIs to access third-party data and services (like the aforementioned Square API does) or turn its own services and data into a platform that attract partners to build upon and brings new customers onto its platform in the process (like the Helix model). For the API-publishing companies, they benefit from the API economy from the added value and new users that third-party developers bring to their services and platforms.

Of course, there is a distinct difference in how a business like Helix and one like Square are positioned in the API economy landscape. For companies like Square, the API-enabled platform is its whole business, whereas for companies like Helix, having an API to allow other companies to tap into its data is a nice way to acquire new users and add value to its a core consumer-facing service by boosting its database. Either way, APIs brings a new dynamic into the business world by allowing companies to work with each other in a win-win manner.

The Perks of API Economy

To a certain extent, the digital economy is built on APIs. In its early days, iPhone famously leveraged a set of APIs to attract developers to create apps to sell in the App Store and in turn reaped the benefits of the exponential increase in functionality those apps brought to the iOS ecosystem. Fast forward to today, both Alexa and Google Assistant are outgrowing Siri in terms of functionality due to the open APIs the former two deploy (more on Apple’s API strategy later) that place less restraint on developers creating voice experiences.

The real potential of an API-driven economy, however, lies in extending this data-sharing structure to non-software companies, which opens up a whole lot of possibility of how businesses can be built and operated. As more and more industries become disrupted by digital innovations, traditional brands are starting to realize the importance of the flexibility and data access that APIs enable.

For example, Walgreens has released an API for its in-store photo printing services that enables developers to build photo apps on its platform. This means that if you want to build a personalized memorabilia-making business a la Shutterfly atop of Walgreens’ photo printing platform to reach new customers, you can. In return, Walgreens gets to turn its photo printing service into a platform boosted by the added value that third-party developers bring. Capital One has also released a set of APIs to allow retailers and other financial services to incorporate a variety of their banking services, such as identity verification and fund transferring, into their own services so as to improve customer experiences.

LevelUp is another good example of a startup that benefited greatly from the API economy by helping non-digital-native businesses transition into the mobile age. The mobile payment company works with restaurants and local businesses to create customized mobile payment and customer loyalty solutions based on its APIs, allowing them to access LevelUp’s unique data and functionality. That last point also points to another perk of the API economy — it democratizes access to insights and fraud protections based on the data aggregated from the various partners using the same API, allowing all parties involved to make more informed decisions.

Looking ahead, blockchain-based applications may spark a second-wave API economy and unlock even bigger potential of the API economy. APIs are, by nature, designed to create interconnected systems that share data freely and more efficiently, and that is exactly what decentralized blockchain applications excel in. If widely utilized, blockchain would allow APIs to share data in a more transparent yet securely encrypted way to protect user privacy and confidential business information, therefore circumventing the aggregators’ tightening grip on data access.

The Potential Risks of the API Economy

Speaking of aggregators, the API economy also comes with a few downsides and risks, the number one being a potential for bad actors to use APIs for data abuse. As we saw with Facebook’s recent Cambridge Analytica scandal, where a vast amount of user data collected via Facebook’s permissive “Graph API” was abused for political manipulation and misinformation, APIs inherently carry the potential risk of data security and malicious misuse. As recent as last week, an API bug on T-Mobile’s staff-facing website, since fixed, let anyone gain access to customer addresses, account pins, and other details using a phone number.

Dealing with fall out of the scandal, Facebook was pressured to put some restrictions on data access for a number of its APIs, including events, groups, and pages, but ultimately that ends up undermining the capacity of advertisers and smaller brands to reach their target audience rather than hurting Facebook’s own bottom line in any significant way. If anything, closing some of its APIs only works to strengthen Facebook’s grip on user data and thus deepen its moat around data access, for it has already aggregated a critical mass of global users and digital attention. Digital advertisers and content creators have little choice but to come onboard, regardless of how much data they can freely access from APIs.

In a way, this illustrates another downside of the API economy, in which the aggregators, once it gets large enough, hold court and get to dictate the terms of data access and API usage, as they are the ones that end up owning all the user data. Twitter is another example of this risky dynamic in the API economy. The company is notorious for repeatedly overhauling its APIs and restricting developer access to its services and data, causing grief among developers and businesses whose apps depend on Twitter APIs for one function or another.

It is worth noting that this aspect of the API economy throws the distinction between platforms and aggregators into sharp focus. As Bill Gates puts it, a platform is a platform only when the economic value of everybody that uses it, exceeds the value of the company that creates it. A true platform, say Windows, has huge incentives to keep the developers happy and facilitate them to build applications using its APIs so that its platform overall can stay compelling to the users, whereas an aggregator like Facebook bares no such incentives (Facebook’s most valuable content are user-generated and not created by third-party developers) and are therefore bound to the mutually beneficial dynamics of the API economy.

Brand Takeaways

Overall, the API economy comes with enormous potential but also some risks. For brands looking to capitalize on this emerging trend as we transition into an increasingly digital-first environment, it is important to first evaluate where your company sits in the value chain, and decide whether you are in a position to use APIs to scale your business or to release your own APIs to attract partners and build out your platform (they don’t have to be mutually exclusive, depending on your business model).

For example, if you are a brick-and-mortar fashion retailer trying to build out your ecommerce channels, then you need to evaluate backend APIs from companies like Stripe, Shippo, and Salesforce to handle things like payment, shipping, and attribution. But you can also release an API that allows developers to access your product catalog and build interesting fashion-related applications that ultimately increase the exposure of your products.

For brands looking to leverage APIs to expand their services and benefit from the API economy, it is paramount that you identify the data vacancy in the market — what valuable data and information that you have but others have limited access to — and then add value to the data you collect and release via APIs. Putting your own stamp on the data without compromising its integrity is an effective way to insert your service into the value chain. Popular APIs for ecommerce sales tracking and attribution, for instance, usually come with analytics tools to help retailers parse through the data and get a clear picture of the shopper journey and sales projection.

It is also important for brands to keep in mind that not all APIs would be successful if they don’t provide significant value to developers. For example, Uber’s Trip Experiences API looks awesome on paper, as it promises to offer developers pursue in-ride and post-ride monetization opportunities. Yet it never really took off. Partly this is due to Uber’s lack of an awareness campaign for this API, but mostly there is simply not enough information nor profit to be gained from using this API.

In this regard, Apple’s API strategy serves as an interesting approach that other brands can learn a thing or two from. Compared to its rivals, Apple favors a closed ecosystem that, for the most part, tends to restrict developer access. Even the App Store retains strong control over the distribution of third-party apps by disintermediating the developers from end users. Its unwillingness to release open APIs for Siri or NFC chips for developers to build on those important iPhone features only makes sense because Apple considers it paramount to maintain control over its user experience. For most brands, prioritizing your user experience and starting with a closed API with a select few of strategic partners would be the optimal way to enter the API economy.

However, Apple does realize that it can’t control everything, and it is more than happy to release APIs for domains that it does not plan to build products for itself, such as healthcare (with HealthKit), medical research (ResearchKit and CareKit), and smart home (with HomeKit). The domain in which a company chooses to release an API can reveal a lot about the brand’s market positioning and long-term strategy, and it is up to their own discretion to carefully evaluate their business model and priorities to formulate a sensible API strategy.

IPG Media Lab

The media futures agency of IPG Mediabrands

Richard Yao

Written by

Senior Associate of Strategy and Content, IPG Media Lab

IPG Media Lab

The media futures agency of IPG Mediabrands

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