Enter the API economy
Nowadays, a lot of applications have an API for internal use. But why not take it one step further and expose these APIs to the public? Some companies are reluctant about the idea. The reason is often very simple: If you’ve put so much time and effort into creating your dataset and algorithms, why would you just let people use all that work for free, right?
Well, it's time to rethink that thought. If you build a good business model, your API might actually be a very promising source of income or even your most important product.
Salesforce.com generates nearly 50 percent of its annual $3 billion in revenue through APIs, according to Forbes. For Expedia, this number is closer to 90% of its $2 billion...
Your API might be a very promising source of income, or even your most important product.
So how does this API-thing work?
Let’s think about the basics: when you’re creating a product, you actually want to solve a problem for your user. This problem can be composed of a number of subproblems. When you translate these subproblems into software projects you have set up, you’ll soon end up with 2 categories: front-end applications (Android app, iOS app, website, …) focused on the user experience, and back-end applications (database services,...) focussed on data and algorithms. Back-end applications use APIs to communicate with each other or with front-end.
Front-end applications, in general, fulfil very specific user scenarios. Back-end applications, on the other hand, might solve more generic scenarios, which could also occur in totally different settings. In other words: the front-end solves problems for the end user, while the backend solves problems for front-end developers. See how we’re not really creating one application here, but more like a platform of applications powered by APIs?
When you’ve arrived at this point you can ask yourself: are the problems solved in my platform API generic? And are they interesting enough to be reused in other use cases?
Or: is it even necessary to develop a frontend application? While developing a product such as IBM’s Watson, isn’t it more interesting for IBM to focus on the algorithms and machine learning integrated in Watson, while they let others build the user facing applications above Watson?
An economy of building blocks
This is where we’re moving to an API Economy: building a public API (or 'open API') doesn’t mean that you should give everything away for free. There are multiple ways of building a business around an API.
While the API provider can focus on the research to improve his services, the external API consumer can speed up high-quality product development. Compare it to the App Store revolution on mobile: by opening up your APIs and connecting to others, you’re really becoming a part of a bigger ecosystem and enabling innovation. You would be surprised what others can do with your APIs.
It doesn’t come for free
Exposing a public or open API is not something you do lightly. It's more expensive than building a private API, as you need to write good documentation, provide maintenance and support, take care of versioning and backwards compatibility, think your API calls through and have reliable infrastructure.
Don't worry, you’re not alone in this. There are companies who focus on API management to help you with most of the issues above. They might cost you, but you can’t do this alone.
Building a good business model
To compensate for the costs, you need a good business model to monetise your open API. Here are 2 examples, but many more are possible:
- You could ask for a fee based on the amount of API calls made. This is the model Google chose for its Google Places API, which can give you all the information that Google has gathered about public places over the years.
- Offering an API for free can give your company more exposure. For companies like Facebook or Amazon, this is more important than direct revenue on an API call. They use their APIs to get as many people as possible onto their platform.
The rise of new types of companies
With the introduction of this API first approach, new business opportunities arise for those who are capable of orchestrating existing services to work together as a new product.
Without third party APIs, Uber would probably still be developing its first prototype.
Take Uber. To make their services possible, a lot of components need to work together: location tracking, route calculation, maps, push notifications, payments services, … If they had to develop every component by themselves, they wouldn’t be the company they are today. In fact, they would probably still be developing their first prototype. But their smart engineers reused pieces of existing services: MapKit and Google Maps for route calculation, payments via Braintree, mailing via Mandrill and cloud hosting with Amazon Web Services to name a few.
This process of reusing existing services really makes a difference. Instead of reinventing the wheel, Uber could focus on what’s really important for the end user: a great user experience. In the API economy, it is important to know what others can do better than you. Using components of another company will cost you some money. But building up your own team of experts for specific difficult software problems, will cost you more.
Ready for the API economy?
The API economy is all about multiple companies working together to create more value than either of them could independently.
As the world of software development is maturing, you will need to solve more complex problems with the help of software. These problems are always composed out of multiple smaller problems, so it makes sense to look around for people who already offer a solution for one of your subproblems, to speed up the development of your final product. In the end, the API economy is all about multiple companies working together to create more value than either of them could independently.
This will result in even more innovative companies, better user experiences and more revenue for all partners.