What is the API Economy?

If you have pitched the idea of a set of APIs to your boss, you might have run across this question. “Why do we need an API, and what does it have to do with an economy?” The answer is the API economy - but it's more than likely that that is going to be met with more questions. So let's take some time to unpack the concept and get through some of the hyperbole surrounding the topic.

An economy (From Greek οίκος – "household" and νέμoμαι – "manage") is an area of the production, distribution, or trade, and consumption of goods and services by different agents in a given geographical location. - Wikipedia

If we take the definition of economy from Wikipedia and the definition of API as an Application Programming Interface, then what we should be striving to create is a platform (as the producer of the API) that will attract a set of agents that will use that platform to create, trade or distribute goods and services to other agents over the Internet (our geography has expanded). The central tenet of this economy is that the APIs themselves need to provide the right set of goods (data, transactions, and so on) to attract other agents (developers and business partners) that can grow their businesses alongside ours and further expand the economy.

This piece from Gartner explains the API economy very well. This is a great way of summing it up:

"The API economy is an enabler for turning a business or organization into a platform."

Let’s explore a bit more about APIs and look at a few examples of companies that are doing a good job of running API platforms.

The evolution of the API economy

If you asked someone what an API actually was 10 or more years ago, you might have received puzzled looks. The Application Programming Interface at that time was something that the professional software developer was using to interface with more traditional enterprise software. That evolved into the popularity of the SDK (Software Development Kit) and a better mainstream understanding of what it meant to create integrations or applications on pre-existing platforms. Think of the iOS SDK or Android SDK and how those kits and the distribution channels that Apple and Google created have led to the explosion of the apps marketplace.

Jeff Bezos’s mandate that all IT assets have an API at Amazon was a major event in the API economy timeline. Amazon continued to build APIs such as SNS, SQS, Dynamo and many others. Each of these API components provided a well-defined service that any application can use and has significantly reduced the barrier to entry for new software and service companies. With this foundation set, the list of companies providing deep API platforms has steadily increased.

How exactly does one profit in the API economy?

If we survey a small set of API frameworks, we can see that companies use their APIs in different ways to add value to their underlying set of goods or create a completely new revenue stream for the company.

Amazon AWS

Amazon AWS is the clearest example of an API as a product unto itself. Amazon makes available a large set of services that provide defined functionality and for which Amazon charges with rates based upon usage of CPU and storage (it gets complicated). Each new service they launch addresses a new area of need and work to provide integrations between the various services.

Social APIs

Facebook, Twitter and others in the social space, run API platforms to increase the usage of their properties. Some of the inherent value in Facebook comes from sites and applications far afield from facebook.com and their API platform enables this. Twitter has had a more complicated relationship with its API users over time, but the API does provide many methods that allow both apps and websites to tap into Twitter content and thus extend Twitter’s reach and audience size.

Chat APIs

Slack has created a large economy of applications focused around its chat services and built up a large number of partners and smaller applications that add value to the platform. Slack’s API approach is one that is centered on providing a platform for others to integrate with and add content into the Slack data system. This approach is more open than the one taken by Twitter and the fast adoption has added large sums to Slack’s current valuation.

Along side the meteoric rise of Slack, the concept of the bot as an assistant has also taken off. Companies like api.ai are offering services to enable chat services with AI as a service. The service offerings that surround the bot space are growing rapidly and offer a good set of examples as to how a company can monetize their API.

Stripe

Stripe competes in the payments as a service space along with PayPal, Square and Braintree. Each of these companies offers API platforms that vastly simplify the integration of payments into web sites and applications. Anyone who has built an e-commerce site before 2000 can and will appreciate the simplicity and power that the API economy brings to the payment industry. The pricing strategy in this space is generally on a per use case and is relatively straightforward.

It Takes a Community to make the API economy work

There are very few companies that will succeed by building an API platform without growing an active community of developers and partners around it. While it is technically easy to create and API given the tooling available, without an active support mechanism and detailed and easily consumable documentation your developer community may never materialize. Facebook and AWS are great examples to follow here. They both actively engage with their developer communities and deliver rich sets of documentation and use-cases for their APIs.