The API economy

This article was authored by Jouko Ahvenainen, and was originally posted on telecomasia.net.

Once upon a time many companies were able to manage their whole infrastructure and implement all services alone for a customers. Telecom operators offered the telephone services – including value added services – and tried to make the ecosystem more dynamic with their own intelligent networks. And they wanted to manage applications in mobile phones too. Banks were able to manage the finance needs of ordinary people, like lend money, pay interests to savings, help with wealth management and handle money transfers. Manufacturing companies had their own machines and IT that was their own proprietary territory. But this time is over, and now companies must survive in the API (application programming interface) economy.

APIs as such are not such a new idea. Operating systems, databases and many software solutions have had APIs for decades. Newer things are open APIs, web APIs and the API economy. This involves companies opening their own platforms or solutions for third parties to innovate and develop new applications on the top of their own solutions. It also means new earnings models, accelerated innovating and more networked business models.

In the telco world we have seen that carriers cannot dominate the business anymore and they have become bit pipes. Carriers tried to fight against the bit pipe development for years, but it wasn’t very successful fight. Broadband connections moved all services in the network to be from third parties in the Internet.  With mobile data connections the iOS and Android application environment left the carriers only transferring data. Telcos and on the phone side Nokia were companies that very much tried to dominate alone with their systems and applications. But they were not able to compete with solutions where basically anyone had the opportunity to develop a new application.

Successful internet giants, like Salesforce, Amazon, Google, Twitter, and Facebook, have been active to offer APIs to third parties. Salesforce has earned more than half of its revenue through APIs, not from its own user interface. Twitter, Netflix, and Google handle billions of transactions through APIs daily. And we can say Amazon has been a pioneer with open APIs – the online retail giant already had an Amazon Store API back in the early 2000’s. We have good reasons to say that these companies couldn’t have been as successful as they are without open APIs.

Now we are moving to a new era of the API economy when APIs are no longer the  territories of internet and mobile companies alone, and instead are implemented in basically any industry. This trend is also linked to the fact that the internet and mobile are becoming a fundamental part of all industries and businesses. And some companies in traditional businesses have concerns that are very similar to the ones telcos used to have.

Fintech and digital finance are changing finance services. And banks have similar fears as telcos did 15 years ago. Soon they might have an expensive and regulated infrastructure on their hands, but with all new and attractive services flowing to third parties like online investing, lending, and wealth management services, online and mobile payment and money transfer services, and robo-advisor type automated services. And APIs have an important role to play in this.

Some banks have also become more active in this development, for example, BBVA develops banking APIs. At the same time many fast growing new-comers offer many kind of finance APIs, for example, Crowd Valley for finance back office for lending and investing, Stripe for payments, DealIndex for Alternative Finance data. Xignite for public market data and GBGroup for identity verification.  These are just some examples, but they illustrate how many things can already be done today over an API in the finance world. Banks have good reasons to worry.

But it is not only the finance and telco world where this happens. The same happens also in the traditional manufacturing industry, when we start to see concepts like Industry 4.0 (read Industry 4.0 – Another type of revolution) where shared manufacturing infrastructure, 3D printers and logistics have key roles. And IoT very much needs open APIs and an API ecosystem, when all kind of devices, data bases, and applications must talk to each other. Travel and flight booking services are already in the API economy and the public sector goes there too e.g. with open data concepts.

APIs, shared resources, and networked business models are key components of innovations and new development in most industries. Even the last companies must soon realize that they cannot develop and control everything alone, they must use services from other companies and open their own services to third parties. The success is measured much more on how you can be a hub in the API economy than build the largest infrastructure alone. And all this has a lot of impact on business models, partnership models and organization culture too.

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