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API economy

The API economy refers to the set of business models and practices designed around the use of APIs in today's digital economy. It involves the exposure of an organization's digital services and assets through application programming interfaces (APIs) in a controlled way.

APIs ensure that the data extracted from one software application is formatted and passed to the next application securely and accurately, even if the associated app's feature sets have been updated. Essentially, they allow two applications to seamlessly communicate and share data with each other.

The effects of the API economy on businesses

The ultimate goal of the API economy is to facilitate the creation of user-focused apps that support line-of-business goals and improve workforce throughput. While API tools have always played an important role in software development, today's demand for data integration has been encouraging vendors of all sizes to "go modular" and break complex software components down into smaller, containerized components called microservices. Experts predict that as software developers see the economic advantages of integration, many large, monolithic software systems currently supported on premises will decompose into highly organized sets of microservices available in the cloud.

The API economy and the use of microservices make data and services more accessible and flexible. By building a business model around APIs, businesses can rapidly scale up by using APIs. This can be done by accessing third-party services and data, or using APIs to transform their own data and services into a platform that encourages others to build upon and use it.

One example of this might be an e-commerce company that offers a customizable API to its customers. Its customers -- small businesses and online vendors for example -- can use the API to customize their point-of-sale systems to better suit their needs and adapt it to their way of processing payments online and physically. In this business model, the e-commerce company benefits because it can structure its business around offering its API to vendors. The customer's business benefits as well because it has a more customizable product and access to more tools and data.

The importance of the API economy

APIs simplify access to the information contained in software platforms and their functionality. They make software platforms and their data easier to integrate. The API economy is important because it enables businesses to profit off their APIs and create business models around them. It allows a business to monetize a portion of its data and services, and to turn itself into a platform. 

The proliferation and growth of mobile computing and the internet of things (IoT) is partially responsible for the increased demand for data integration. This is due to the sheer amount of data they create and the varied spectrum of devices and accompanying programs they use to process that data. APIs are the building blocks of IoT because they allow IoT devices to communicate together quickly without a human user present.

Instead of building all the APIs that IoT and mobile devices use from scratch, developers can mix and match APIs from different sources, allowing for interoperability, customizability and efficiency to meet increasing consumer demands.

Benefits of the API economy

The main benefit of the API economy is increased access to and use of APIs.

One of the main benefits of the API economy is that it allows and encourages consumers to collaborate with API providers to deliver more engaging and efficient user experiences. APIs and microservices can be stacked, modified and improved faster than products in a physical economy. This allows organizations to streamline business processes and participate in previously inaccessible business ecosystems through the increased flexibility, agility and data access that APIs afford them.

By exposing the interfaces that allow microservices to communicate with each other, vendors can meet the needs of specific groups of customers without having to re-architect software; it also gives customers more control over vendor applications.

Other benefits include:

  • Continuous improvement. APIs are opened to third parties (customers, shareholders) to be customized and altered.
  • Better customer experience. Because APIs are open to customization, users and providers can alter them and provide feedback to optimize customer experience.
  • Faster product delivery. The API economy creates a set of open, industry-approved tools that developers can pick from instead of creating them from scratch.
  • Additional revenue. Because products can get to market faster, companies have more freedom to experiment and find new ways of generating revenue.
  • Organizations not traditionally considered software companies can take advantage of APIs to improve their business in ways that would be impossible if they needed to hand-code their own proprietary software. The API economy equalizes the playing field, allowing large enterprises, small to medium-sized businesses and small-time developers to collaborate using the same tools.

Challenges of the API economy

As managers look for creative ways to monetize services and assets through APIs, it is expected that vendors will need to make API management simpler to accommodate the needs of the citizen (non-technical) developer in low-code software development environments.

  • Data abuse. The API economy involves opening up a small portion of company data and services to other members of the economy. Examples of data abuse stemming from API misuse include Facebook's Cambridge Analytica scandal and an attack on MSNBC's website that manipulated the company's public Bitly API.
  • API 'aggregators.' When an entity gains a large enough base of digital users, it monopolizes a section of the API economy and can control the terms of API usage and data access unchecked (this is also known as holding data hostage). This destroys competition in the market and limits businesses that rely on that provider as there are no other options. One example is Twitter, which has a reputation for consistently overhauling and restricting its API, which is challenging for companies that rely on Twitter's API. The API no longer serves as a platform that companies can use to increase their own value.
This was last updated in August 2020

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