What is the API Economy & why it matters to your business

Blog Updated July 19, 2019 · David Brown

First let’s define an API

An API (or “Application Programming Interface”) is a software intermediary for an application or service that enables other applications or services to send them requests and receive responses to those requests. The API will define the terms of the request and response such as the structure of the data, the data required, the protocol and security settings.

An API makes it easier to integrate applications and services as the API forms a “contract” governing the communication between them. This gives developers certainty when integrating systems and can also enable larger monolithic services to be broken down into smaller independent services with defined interfaces.

API adoption has exploded

The ability to innovate at an unprecedented rate is the key to succeeding in today’s fast-paced digital world. In recent years, many businesses have realized APIs, that set clearly defined methods of communication among various software components, are an effective way to enable the digital transformation of their enterprise.

Even though APIs have been around since the 1960s, Web APIs took off in the early 2000s and exploded earlier this decade with the adoption of cloud computing and Internet of Things (IoT) devices. Today, APIs are responsible for connecting people, systems, things, and algorithms, enabling the creation of new user experiences by simplifying access to information and functionality.

According to API directory ProgrammableWeb, the number of Web APIs has grown 1,000% this decade alone from less than 2,000 listed in the directory at the start of the decade to over 20,000 today.

So what is an API Economy?

Companies create value from proprietary data and processes by publishing APIs

An ecosystem emerges as the number of companies publishing APIs expands

New unanticipated use cases are created from the ecosystem of APIs

When a single organization unlocks its’ proprietary systems, processes and/or data by publishing an API it creates value, and potentially a revenue stream, for both itself and its business partners. Multiply this effect by many organizations and it creates an ecosystem known as an API economy whereby value is created from APIs that not only operate independently but also enable new and unique applications to be created from a mashup of several APIs.

Instead of publishing an application that solves a specific use case, in an API economy, a business can package the functionality as an API, and make it available for entirely new use cases that could not have been anticipated by the publisher of the API.

Take Uber for example. Uber was able to take public APIs, such as Google Maps and a payment gateway, combine them with their own unique processes and then deliver them in a mobile application that would end up changing the entire transportation industry.

APIs can be opportunities to create new revenue streams for existing companies whilst API first companies such as Twilio and Contentful have built businesses entirely around usage of their services via APIs.

This is having a very real impact on a business's revenue streams. According to the authors of Platform Revolution, Salesforce.com generates 50% of its revenues via its API whilst for travel site Expedia a whopping 90% of its revenue is conducted via its API.

The API Economy is changing everything

“In the past, the biggest companies were those closest to the data, able to impose a tax, or lock-in to their platform,” says Matt Murphy, a managing director of Menlo Ventures, a seed to growth venture capital firm. “In the API economy, the biggest companies may be the ones that aggregate the most data smartly and open it up to others.”

The API economy fundamentally changes the business value chain, forcing business to rethink their strategies and expand into new markets. When IBM premiered its question-answering computer system capable of answering questions posed in natural language, called Watson, on the quiz show Jeopardy! everyone was curious what its first commercial application would be. The answer came two years later when the tech giant announced that Watson would be used for utilization management decisions in lung cancer treatment.

Previously, IBM may have maintained a focus on lung cancer treatment, but in the era of the API economy, a decision was made to open access to Watson through APIs, making it available to the entire world. “By sharing IBM Watson’s cognitive abilities with the world, we aim to fuel a new ecosystem that accelerates innovation, creativity and entrepreneurial spirit,” said Michael Rhodin, Senior Vice President, IBM Software Solutions Group.

“The significance here is that IBM will enable other companies, large and small, to embed access to Watson into their products and services, or better yet, to build applications on top of it,” said Mohamad Makhzoumi, Partner at New Enterprise Associates. “This could bring about a paradigm shift not only in how people interact with computers but in how we live our lives.”

As a result of IBM’s decision to open Watson to the entire world by releasing an API, the applications of the AI-powered computer system expanded to cover everything from healthcare to education to weather forecasting to fashion to tax preparation. The important thing is that IBM developers can now focus on adding more functionality to Watson, knowing that others will leverage it to solve real problems.

Looking Ahead

Although an API defines a contract of communication between two computer systems there have been several competing formats for API definitions. More recently one of those formats, OpenAPI, has emerged as the winner in these format wars which will result in more standardisation and better tooling for developing and managing APIs.

One of the consequences of the explosion in the adoption of APIs is that they attract more attention for malicious use by hackers wishing to take advantage of weak API security practices.

Without strong authentication, hackers can easily harness data using public APIs and use it in ways the businesses have not originally imagined would be possible. While most data exposed by APIs is considered non-critical, there is a much wider issue of trust that must be taken into consideration.

Users today care about their privacy and security, and they already harbor resentment against the aggregators’ tightening grip on data access. API-related security incidents undermine the potential of the API economy.

Publishers of APIs can mitigate security concerns by adopting techniques such as OAuth2 authentication of users, enforcing SSL communication to encrypt data transfers, encrypting data at rest, and applying network security.

The modern digital economy is built on APIs, which allow different software components to communicate with one another, enabling businesses to create ecosystems around their services. In the API economy, businesses must rethink their strategies to reach the agility necessary for delivering digital innovation at the pace of business. Those that succeed will be able to extend their reach into a larger ecosystem and take advantage of the latest technical innovations faster than their competitors.