The API Economy

By Khali Henderson

If you’re a Gen-Xer like me, you might remember the first time you visited the World Wide Web in the early ’90s. It was like a whole new magical world inside your computer. Right from your desk, you could go to the library and access tons of information, you could go to a newsstand and get the latest headlines, and you could go to a store and buy stuff and have it shipped to your house. It was a revolution in consumption of information, services and products. And, as I recall, it was a huge time suck. We all became so enamored with the experience that we never wanted to leave. Our obsession with the Web became the preoccupation of businesses, which all were clamoring to establish a Web presence and tap into this market. The Web economy was born.

Over the past 20 years, the Web economy has become a well-oiled machine. Web initiatives we once regarded with wonder, we would now scoff because of their lack of sophistication. Some of today’s most successful brands Amazon and Google were born in Web’s virtual world with no brick-and-mortar storefront to limit their reach. The Web became the laboratory for innovation; what could be imagined could be coded into Web-based applications. Both commerce and culture changed we went from sharing music files (Napster) to sharing photos (Flickr) and videos (YouTube) and now our intimate secrets (Facebook) online. And we’ve all become expert at distilling our thoughts and marketing messages into 120 characters or less.

The Web economy has been world-changing to say the least. But there is another movement afoot that promises to dwarf that: The API Economy.

“If you think about the size of the shift to the Web, this is like a 10X or a 100X shift,” said David Andrzejek, vice president of telco for Apigee Inc., an API management company that’s one of many that see our economic engine shifting away from the Web to applications programming interfaces.

That’s because unlike the Web, APIs are force multipliers.  Instead of trying to get users to a central website, you are extending your services to other websites and applications on whatever  endpoint they are using. It’s the technology equivalent of bringing the mountain to Mohammed (and David and John, etc.)

An Apigee blog entry from November 2011 illustrates the shift as the difference between a company saying, “Here is a website where you can deal with us,” to “Here are the APIs and now you can work with us.”

A Digital Channel

An API is a programming code that allows two applications to communicate, or interface, with each other. They enable companies to expose functionality from one application into another.

A common example is integrating CRM with contact center communications in order, for example, to better manage customer interaction by automating call tracking rather that relying on people to keep manual logs.

Indeed, CRM powerhouse Salesforce.com is reported to make more of its revenue from APIs than from end-user licenses. Because Salesforce.com is a market leader, many other companies want to get their complementary applications in front of Salesforce.com users; nearly 2,000 such apps are hosted in the company’s apps marketplace.

But the inverse may be even more interesting: distributing your application or functionality to many outlets or channels through APIs. Think about the way Facebook and Twitter integrate into other applications, generating activity for their social media sites.

Other businesses even ones that we would not consider Web-based are doing this, too. Apigee’s Andrzejek cites the example of TransUnion, which exposes APIs to its credit scoring service, enabling issuing banks to embed the functionality into their Web-based loan processes.

In another example, Walgreens has exposed an API for QuickPrints, a service that enables photo printing from iPhone, iPad and Android mobile devices. While this has increased usage of the drugstore chain’s photo printing services, it has had a more important impact boosting foot traffic and, thus sales of its other products and services, Andrzejek explained. Walgreens plans to expand available APIs. “We started with the photo print feature, but our goal is to expand to all areas of the business, from pharmacy to the health and daily living shopping experience,” said Joe Rago, senior product manager for Walgreens Mobile, in a case study published by Apigee.

In both of these examples the APIs enable another distribution channel for these companies’ services. And that is what’s driving the shift: reaching more customers, selling more products and making more money.

It’s this upside potential that has companies rethinking their Web business strategies. “Companies are reconstructing their websites and e-commerce systems to leverage these APIs,” said Andrzejek, noting that big, monolithic websites are being downsized into widgets. And, increasingly they are targeting mobile devices smartphones and tablets where apps reign supreme.

“All your traffic, we think, over time is going to migrate to these APIs,” Andrzejek said. “Whether it’s your website, traditional mobile devices, new alternative devices, they are all going to communicate through APIs. It’s kind of like a universal connector.”

Beyond Connectors

But connecting two applications so the functionality of one is available in the other is just the beginning. The true potential of APIs to drive the economy lies in enabling new services.

“The power of APIs is unlimited,” said Jason Porter, vice president of business operations for the Emerging Markets Business Group at AT&T Business Solutions. “It is possible to create an entirely new service simply by combining two or more separate functional APIs.”

AT&T is among a new wave of telephone companies to open the kimono and allow developers to use its network functionality to create such new services. “Opening up APIs is a fundamental part of how we’re changing the way AT&T does business,” said Porter. One example is a suite of APIs around AT&T Watson speech technology, which allows developers to add the voice engine to their apps.

Twilio is another company focused on easing the integration of voice and text functionality into Web and mobile applications. Twilio’s cloud-based API taps into functionality from a range of telecom service providers with which the company has wholesale relationships. It also has developed its own intuitive markup language called TwiML, to make it simple for developers to use. For example, if you want to use text-to-speech, you just use the word “say.” All of this is available on a pay-per-use basis via the cloud.

And it’s being used by developers to create new services that have nothing to do with core telecom services. In a high-profile example Uber, the innovative car service, uses text messaging capabilities exposed through Twilio to keep customers updated about the status of their ride in real-time.

The Cloud Factor

The cloud is both a beneficiary and benefactor of the API Economy. On the one hand cloud services are enabled by APIs. Cloud infrastructure providers, for example, enable customers to spin up virtual server instances, take them down and reconfigure them using APIs.

APIs also are critical for making disparate cloud applications work in concert. “In cloud computing, leveraging APIs is absolutely essential,” said Larry Walsh, president and CEO for channel consulting firm, The 2112 Group. “Most cloud platforms and applications remain isolated; they don’t speak to each other natively. Therefore, what you have is a multiscreen experience. It’s beginning to get better because there are APIs. There are means to customize and create interconnects between applications so that they can share information more easily.”

On the other hand cloud enables companies to more easily and cost-effectively expose their APIs to developers as do Twilio and Apigee. Hosting APIs in the cloud also offers the ability to provision and deprovision as needed.  

In addition, the cloud has driven down the costs of new app development. “The fact that you can go to Rackspace or Amazon and spin up some instances and  take two, three, four APIs and combine them into an app has dramatically reduced the cost of launching new services,” said Andrzejek. “That adds fuel to the API economy.”

Cloud computing also allows businesses to scale as usage of  their API-enabled services grow. “The cloud enables you to quickly adapt to what’s happening in your business,” said AT&T’s Porter. “For example, if you used APIs to create and launch a service and that service takes off, cloud can enable you to scale your business on a near real-time basis. You can add more or less storage or compute power as you need it.”

The Channel’s Opportunity

A new value chain is emerging wherein business’ data and systems are exposed as APIs that are then used by a developer employee, partner or third party to build an app, which is consumed by end users (see diagram below).

One role for the channel is in helping companies to expose their APIs through platforms like Apigee’s. The company primarily works with large companies, such as telecom carriers like AT&T or integrators like Accenture. But it also offers a free app for others to use.

A second opportunity is in developing apps for niche markets. “It’s the concept of mass fragmentation,” said Andrjezek, explaining that a large company is unlikely to build for a small market, but it will leverage partners to take some of the core capabilities for specific market niches.

“Enablement and use of APIs can help a solution provider generate revenue through services they can build on top of AT&T’s solutions [for example],” said AT&T’s Porter. 

Both of these opportunities require partners to have (hire or contract) development or integration expertise. “Solutions providers should obtain the technology expertise and make an effort to expose and consume APIs because their end-user business customers will likely move to this model as well,” Porter said. “Evolving their models will help them not only drive efficiencies and ease of business, but also potentially create new revenue-generating services.”

Analyst Walsh agrees. “We believe the partners that are going to be most successful in the next five years will be those that don’t just sell a product or service, don’t just manage a product or service, but are performing or delivering applications that have definable business outcomes,” he said. “Short of developing applications out of whole cloth, they can use APIs to integrate existing tools to create new offerings that have uniqueness and deliver value to market, which also carry a different level of margin for profitability.”

Walsh said APIs enable partners  to expand their average deal size by selling multiple products at a blended margin and adding professional services fees for the development work, which carry margins of 60-70 percent. “So, you put all that together and it’s a far more profitable, more advantageous model than selling products individually. On top of that it has the added benefit of being unique because you are driving toward a true business outcome for specific clients and it separates you from companies that don’t have those capabilities.”

MORE INFO

Hear more about the channel’s opportunity in the API Economy in the Keynote Roundtable, “The Cloud’s Killer App,” at Cloud Partners, a Channel Partners’ event, Sept. 11-13 in Chicago.