What is the API economy?

November 8 2016

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What is the API economy? We believe that the is one of the most profound occurrences to affect global business today. It is transforming every company and every industry — no matter how big your company is, no matter how established your industry is, no matter what kind of competitors you have. The is the sum total of all the data transactions that are enabled by APIs.

The API economy affects the way enterprises should be thinking about APIs and achieving their digital transformation goals. To understand just how important the API economy is, a historical analogy will set it in context and reveal how transformational APIs are and what they’re doing to the way we work, live, travel, and engage with one another.

The API economy and the Industrial Revolution

APIs are one of the products of a wider revolution, which is almost as profound as the industrial revolution. We are going through a digital revolution.  Some commentators have called the current period the fourth industrial revolution. However you choose to mark this period of human history, there’s no question that this is a period of extraordinary change.

The Industrial Revolution was one of several major points in human history that really had a transformational change on everything that we do. It marked a phase shift in almost every aspect of everyday life.

The seeds of a revolution

The first thing to think about is how does a revolution start? The Industrial Revolution actually started in the very small country of Great Britain. How did a small country on the northern edge of Europe create this momentous event in human history?

Four factors started the Industrial Revolution:

  • Demand: At the moment when the Industrial Revolution began in Britain in the 18th century, there suddenly were enough people with enough income that there was demand for new types of products. Constant warfare with neighboring countries and tribes had largely ceased, so there were more people, and the population grew and stabilized at a much higher percentage rate. In addition, the end of hostilities led to the rise of free trade, as Wales and Scotland went from being enemies to trading partners.
  • Resources: Raw resources were discovered that were key to economic expansion, like coal, which ended up literally fueling new products for which there was great demand.
  • Innovation: Textiles were extremely important to the British economy at this time, so Inventions that emerged like the spinning jenny and other innovations around weaving and sorting cotton had a profound economic and social impact. These machines gained a 50% increase in efficiency and reduced the manpower required to do these jobs. While this increased productivity and caused economic gains, it also caused the loss of traditional agrarian jobs, disrupting society greatly and giving rise to a more urbanized population.
  • Adaptation: an often forgotten component of the industrial revolution is adaptability and patience. The industrial revolution drove new adaptations on new inventions. The key one here actually was steam power. We figured out a way to capture steam power in a way that was much more efficient to be harnessed for different purposes like the transport system that helped move the products around or some of the manufacturing techniques as well.

Do we have the right ingredients for a new Industrial Revolution?

Are the conditions in place for a revolution as momentous as the industrial revolution? We’ve already had one digital revolution, and that was the World Wide Web. When the web surfaced in the early 90s, only a couple thousand people were on it. Now, today, it reaches all the corners of the globe. In the early 90s, the notion of commerce and moving to the web was very important; we started digitizing our access and move more to the global market, enabled by the web.

Now we have to ask if we have the right conditions — demands, resources, innovation, and adaptation — for another digital revolution.  

  • Demands: there are now more than 3  billion people connected to the internet. That’s a staggering number, and yet it’s only 40%of the global population. So there’s a huge addressable market.
  • Resources: The resource driving the second digital revolution is data. We’ve gone from coal to data. Data is the raw product that’s powering the API economy and the digital revolution as a whole. And there’s a lot of it.
  • The amount of data from 2005 to 2020 is going to grow 15-fold. The enterprise right now is pretty inefficient in storing data because storage is so cheap. Our struggle is really not getting the resource, but figuring out how to use that resource into something that’s useful and something that’s actionable for our companies and for solutions that we provide to our consumers.
  • Innovation: The web has really shifted from a place where people interact to get more information to a platform where we engage business both directly and indirectly. It used to be that the web was a direct transaction from enterprise to audience: how does a company get an audience to their site and look at their products? This not a very efficient model when you have an addressable market of 3 billion people. When adding APIs, you go from a direct mode of interaction to an indirect model of interaction. Your website can still use the same APIs to get and gather information on all exposed functionalities, but now you can give those same capabilities,  data, and functionality to third parties. It also means that third parties can build applications around the data that you provide, and mobile verification can use your APIs to create a better user experience.
  • Adaptation: The companies that have most successfully adapted to these conditions are the ones that are taking these elements and creating new business models. These companies leverage the web as a platform to either innovate or adapt old business models into new paradigms. The classic examples are Uber, Square, or Amazon.

How APIs fuel this digital revolution

The demands are changing and frankly, every company is under pressure to move quickly. This is because literally anyone today can spring up and start creating new businesses.  Competition doesn’t just come from companies in your particular space. It can come from anywhere – a startup or an established player, a traditional competitor or someone completely outside the field. The explosion of competition in financial services is a great illustration of this. if you don’t keep moving, you don’t keep adapting, then someone else is going to come up behind you and figure out a way to do it.

This is the key to why APIs are so important and valuable to the enterprise. Once everything is exposed as an API, your competitive advantage is how you stitch all those APIs together with your data to create new innovations and new adaptations. The API economy is the global sum of digital transactions between multiple parties. APIs really are the new business channel to engage with partners and customers.

The great thing about the API economy is that enterprises are using cues from that economy to understand how to take those innovations published on the open web and adapt them to their own business models. An important component of the API economy is that you can’t just consume APIs — it’s not just about consuming data or connecting to SalesForce or Amazon or both. In order to participate in it, and extract business value out of it, you actually have to publish APIs as well. You can’t just be passive.  

If you start a business today, chances are, you’re thinking about the API strategically as one of your assets. Older and more established businesses may not be thinking that strategically about it, but the API is really an important business play.

There are millions of APIs and services in the enterprise. But they’re often not being used, captured, or leveraged in the right way. Additionally, the enterprise is going to be driving millions more implementations of APIs in the next 3-5 years. There’s a lot of new challenges around getting it right the first time because there’s a lot of new infrastructure to take care of.

One more ingredient for a revolution: dissemination of knowledge

Returning to the Industrial Revolution analogy, there was something else that sparked this. There’s something else in the mix —  not just demands, resources, innovation and adaptation.  It takes something else. How did the industrial revolution spread, how did that get over to the US? To Europe? It was the dissemination of knowledge. Even though a revolution might start in one place, it’s not really a revolution unless it spreads.

In the 19th century, companies and governments would get together specialists and would go to different countries and visit factories to see how other people were progressing.  We now have much more access to information thanks to the web. On the open web, there are over 16,000 APIs that every enterprise can go and look at and adapt. One of the reasons SOA initiatives often failed, other than we obviously approached it the wrong way, was that there were no collective learnings. No company was talking to each other really about what was working and what was not. Everyone was just trying to do the same thing and everything failed on the same points. Today, thanks to the API economy, entrepreneurs, based on the collective learnings and knowledge of others, can leverage existing data and assets within the enterprise, and deliver them to the market in new ways.

The four pillars of an API strategy

Most enterprises have a technology architecture that consists of a multitude of systems, databases, cloud applications, and more.  It’s the mainframe system of the I series, it’s the SAP in Oracle package applications, the custom apps that you have and the databases and file systems that you’re storing data on. You’ve got B2B networks, so connecting with customers, suppliers, and partners is done now through APIs and web servers more and more. You’ve got social channels which are valuable sources of enterprise data.

This is a highly fragmented environment, so you’ve really got hundreds or even thousands of new endpoints inside and outside your enterprise. The challenge is how do you connect all this stuff and make it useful and exposable through an API?

Critically, APIs are really putting the framework around how the enterprise is going to innovate and adapt to this new world. This is where you come in. The new products and new service innovation happened between in the middle of all this. It’s figuring out how to increment the internal APIs to free up the data and then leverage that data to drive more compelling B2B APIs to partners and suppliers. It’s also sucking in the new great capabilities that are available on the web. Open web APIs are a fantastic innovation channel. You know the phrase “there’s an app for that”? Well, the same is true of an APIs. If you want a prediction engine or you want facial recognition software, or you want telephony software, or you want to build a recommendation engine into your application, then there’s an API for all of that. You can leverage a lot of people’s existing innovations to create new and better products and better user experience for the applications you released.

This is pretty critical. This is really where the innovation is happening. This is where the digital revolution happens. You’ve become part of the API economy by playing in that space.

How do you begin an API strategy?

The key takeaway here is your API is not just a technical interface on top of a database; rather, your API really is a new business model.

It’s a new way of thinking about how you’re going to engage with your partners and customers. This is critical because you need to think of your API as a product. As such, you need to develop it as you would any other product in the business. You need to be thinking, that your API is your new business offering. APIs aren’t just a technical detail, but need to be designed, deployed and managed on business criteria. Some APIs are free, some have a premium level, some are pay per use, some come as part of a subscription. There’s many ways you can deliver these APIs, and it’s worth it to do the business analysis to figure out what resources you have, who your audiences are, and how to better match solutions to those particular audiences through your API strategy.

The economy is changing thanks to APIs opening new channels, both of revenue and also innovation. Resources here is your data and services, and many enterprises, that’s really what they’re in the business of doing, is actually using data in interesting ways to help their consumers, but you can’t rely on the current business models because, frankly, they’re not going to be viable in the next 3 years. Some of them will survive, some won’t.

The API strategy is the place where you can start opening up new opportunities to trade with customers and partners. The key thing with the APIs is not just to let the users do the innovation, but as you all open up to partners and to your consumers and to developers, they will also drive innovations for you. They’ll bring you into the applications. They’ll bring you into the mobile platforms if you have something that’s useful to them. You’ve really got to think about what your API strategy is and what service are you going to have delivered to the outside world.

We’re right in the mix of enterprise Darwinism, it’s really the survival of the fittest and those that adapt that are going to survive the next 5-10 years, and those that don’t really will fall by the wayside. The market is bigger than ever before, there are more consumers than ever before, but their demands change. If you don’t adapt, if you don’t create these new services, and this is what the role of the new enterprise is, it’s to create these differentiated services to compete in the API economy.

Take a look at our approach to API strategy, called API-led connectivity. Also, check out our real-world case studies of the rising value of APIs to today’s enterprise.


 


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