Gone are the days of looking at application programming interfaces (API) from a purely technical perspective. In an increasingly digitalized economy, APIs are becoming key enablers for companies to build and expand digital business models. There is huge potential for these technical interfaces to create digital value networks that span the globe.
There is nothing like the complete freedom and creativity you feel when you open a box of Legos. The possibilities are literally endless. Good APIs are like Legos that developers mix and match to create new digital products and services. Combining APIs quickly and easily enables developers to speed up development timelines and cut time-to-market significantly.
Companies like Uber have recognized the potential early on. Instead of developing their own map and payment services, they opted instead to integrate software from external service providers via APIs into their apps.
Thanks to this modularity, developers can outsource support functions to specialty service providers (“micro-outsourcing”) and stay focused on advancing their product’s core processes that set it apart from its competition. Adding new features and expanding the company’s own value proposition does not take a lot of extra time and effort anymore – a huge advantage in an era of scarce development talent. The rule of thumb is this: The more a company manages to meet its functional needs internally (i.e., data, processes, functions) using APIs, the better equipped it is to scale its proprietary digital innovations.
Using scalable APIs consistently means that there is essentially no marginal cost in digital product development. With each additional call, the variable cost for providing the service approaches zero. And when a company decides to allow external access to its own (core) services, that only increases its profile as a partner. Third parties can integrate the services offered via the API in their own value-added services, and the owner of the API can monetize its services either directly or indirectly – a classic win/win. What customers save in terms of development costs, they gain in terms of development speed.
Creating API ecosystems
In contrast to the analog paradigm, where most corporate partnerships take years of negotiations, APIs offer completely novel models of flexible collaboration in the digital space (e.g., “open innovation”). The Expedia Group is a case in point: Third-party vendors can integrate the travel service provider’s functionality in their own applications and significantly increase market penetration. This transforms the value chain into a flexible value network that allows a group of stakeholders to form loose alliances and work together to create economic ecosystems.
APIs are at the heart of these digital ecosystems. Having access to these digital API ecosystems enables companies to interact with one another on a dedicated platform and to keep their focus on their core products and services.
The platform as hub
API management systems are the core of any API-based ecosystem and the underlying platform – e.g., internal as well as external API marketplaces or developer portals. They link API providers with API consumers and establish the relevant rules and processes (e.g., monetization and billing functions or documentation). This makes interaction on the platform as simple as possible at both the technological and organizational level.
Derived from the term “user experience” (UX) in the e-commerce space, the concept of “developer experience” (DX) has become a key success factor for these platforms. It measures the ease with which a developer – as the platform’s main user – can interact with the platform and its APIs, regardless of whether the APIs are developed within an enterprise or externally.
The simpler it is to participate in a platform, the more likely an ecosystem will form around it. Easy access and a positive developer experience motivates more developers to choose a particular platform. And as the number of APIs on offer increases, the network effect makes the platform even more appealing to new participants – both on the user and the provider side.
Shaping the digital transformation
For many of today’s companies, APIs have massive potential, either to optimize existing business models (e.g., thanks to shorter development times) or to expand them (e.g., by making it easier to form partnerships and ecosystems). All in all, regular use of APIs can bring about entirely novel and scalable digital business models.
This goes hand in hand with newly formed value networks and ecosystems that give companies with complementary or competing products a straightforward way to collaborate and create win/win situations. APIs provide access to these ecosystems, which may, depending on their design, reside entirely within the enterprise or extend beyond corporate boundaries – with the appropriate controls in place. Established players like Lufthansa, Mercedes-Benz or Commerzbank are already pursuing this paradigm through their own developer portals. The US-based FinTech Plaid and other innovative start-ups have taken an “API first” strategy since day one, focusing on sharing APIs and the easy-to-integrate software that they encapsulate. The one call companies keen to get in on the action have to make up front is: Are you looking to join an existing API ecosystem or will you create, operate and develop your own?
The authors:
Sebastian Strugholtz and Fabian Meise work in innovation management for media products at Arvato Systems – a global IT specialist and subsidiary of the Bertelsmann Group’s Arvato.
Prof. Dr. Roland Frank is chair of the Media and Communication Management Department at Munich’s Mediadesign College. His research focuses on innovation management and digitalization.
Their book “Bausteine der digitalen Transformation: Wie APIs Unternehmen den Weg in die Programmable Economy ebnen” (Building Blocks for the Digital Transformation: How APIs are paving the way for companies to join the programmable economy) was published by SpringerGabler in 2021 (ISBN: 978-3-658-35106-9).