APIs: Three steps to unlock the data economy's most promising new go-to-market channel

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“APIs are going to be the driver for the digital economy and unless they [companies] are talking about APIs already, they will be left behind.” This proclamation from James Parton of Twilio, a cloud communications company with more than $70 million in funding, is a shot across the bow for executives who have yet to devote sufficient attention to this emerging and major revenue stream.

Over the past few years, APIs (application programming interface, technical protocols that enable third-party software programs to interact with an application) have recast how B2B and B2C companies are sharing information and reaching new customers. Increasingly, a company’s APIs represent a business development tool and a new go-to-market channel that can generate substantial revenues from referrals and usage fees. Given the strategic importance and revenue potential of this resource, the C-suite must integrate APIs into its corporate decision making.

Tracking API penetration

Several recent trends have increased the strategic importance of APIs. First, the app market has exploded: in the first quarter of 2013, the Apple App Store and Google Play accounted for combined revenues of $2.2 billion, up 11 percent from the previous quarter. As a key building block for apps, APIs have been instrumental in supporting new companies and products. Second, companies that have moved aggressively to embrace APIs have profited handsomely. Salesforce.com, for example, generates nearly 50 percent of its annual $3 billion in revenue through APIs; for Expedia, that figure is closer to 90 percent of $2 billion.  Third, starting in April 2013 there has seen a frenzy of acquisitions of companies that manage APIs for clients. Intel (Mashery, $180M), CA Technologies (Layer 7, undisclosed) and Microsoft (Apiphany, undisclosed) are just a few of those opening the purse strings. Lastly, the government has made concrete moves to promote APIs, including  President Obama’s Open Data Executive Order requiring government agencies to make their data available in open, machine-readable APIs.

These developments represent just the first wave of value that APIs can deliver to businesses. Given the strategic importance and revenue potential of this resource, discussions about APIs, traditionally the domain of the CIO, must be elevated to the head of marketing and head of sales. There’s little time to waste: companies across industries are already following in the path of digital natives and using APIs to generate significant revenues and in some cases build new business models.

Telecoms. Nearly two-thirds of telecom operators have launched or are developing APIs geared to the developer community and enterprise customers. Major players such as AT&T and Telefonica are using their anonymized access to hundreds of millions of subscribers to grant large global brands access to nonsensitive customer data. Federated platforms such as the GSM Association’s oneAPI are promoting the usage of industry APIs.

Healthcare. The mass adoption of electronic health records (EHRs) in hospitals, which rose from 9 percent in 2008 to more than 80 percent in 2013, is driving opportunities for health care players that embrace APIs. EHR vendors now routinely work with providers on APIs to enable third-party services. Payors are also playing a leading role. For example, Aetna’s “CarePass” developer API portal provides regulated access to personal health information for its 20 million members. Payors are also using APIs to make sure payments are consistent with approved procedures. Finally, start-ups that serve providers are also emerging: Eligible, a company modeled on Twilio, uses APIs to validate patient insurance coverage.

Retail. As the share of mobile traffic rose from less than 1 percent in 2009 to 15 percent in 2013,  revenues from APIs and mobile apps have exploded. Sears uses APIs to improve its online user experience, enabling developers to create apps that facilitate product searches and identify store locations. What’s more, the next wave of applications will increasingly combine data and services from other companies, offering a direct channel to reach mobile consumers in new and engaging ways.

Creating a winning API strategy

In developing a strategy that can unlock the potential of APIs, executives must determine the type of access, the fee model to generate revenue, and the API standards to adopt. In these areas, the intersection of business strategy and market factors illuminates the trade-offs.

1. Capturing value through access. The uniqueness of a company’s data and its business strategy largely determine whether to pursue an open or closed API model early on. If a business is looking to drive sales of core products or services, for instance, providing third-party developers with open access to APIs can increase traffic. Open APIs are often used as growth catalysts by earlier-stage start-ups: for example, Twitter’s API enabled the company to build a presence on every mobile platform before hiring an internal mobile development team.  Similarly, by cultivating a developer base of more than 20,000, Netflix was able to offer their service on more than 800 physical devices at a fraction of the cost of internal development.

As companies and products achieve scale, however, the benefits derived by increased penetration and outsourcing development costs decline. At this stage, internal development or more focused partnerships provide tighter control over the user experience and more direct monetization as seen in the case of Twitter.

2. Selecting the right fee model. Companies can offer their API for free or choose from various revenue-sharing and direct-usage payment models. To determine the right monetization model, executives should first assess the intrinsic value of the data or services that an API makes available then determine the payment options that are most applicable to their target audience. More than 80 percent of paid APIs, for example, follow some variant of usage-based payment―in the form of volume pricing, commissions, or subscriptions. Most of these approaches are maturing into a tiered payment model, allowing developers to experiment with APIs for free until reaching a threshold number of API calls and then begin paying based on usage volumes. Other models generate revenues from APIs based on resource usage, as part of a package that consumers can purchase, or through revenue sharing agreements. In our experience, the most successful approach combines limited pilots to test payment thresholds for your customers, then scaling up when the organization has identified tiers that deliver the greatest value.

3. The market: Go it alone or team up. Based on the level of competition, executives select API operability standards that directly enable the most advantageous partnerships for their company’s goods and services. Three options exist, and each reflects a different market reality. If the market is a monopoly or duopoly, business leaders should encourage adoption of a closed ecosystem to capture maximum value. At Google, for example, free APIs from Google Play Services (e.g., 3D MapsGL maps) are playing a significant role in encouraging developers to build apps for the closed Google Play Ecosystem, driving the development of apps for Google-approved Android devices(vs. Android forks from other OEMs). As a result, Android has closed the gap with Apple in share of mobile-app revenues, going from 1:5 two years ago to a current ratio of 1:2.3.

By contrast, in markets with a number of large players, achieving global or national scale can be challenging without API standardization. In the telecom industry, for example, each operator initially attempted to build an individual ecosystem and creating significant burden for developers. This enabled Twilio to capture value – and significant market share – by providing a “wrapper” that unified the distinct telecom API standards. Finally, in markets resembling perfect competition, a common standard set by a leading player or an advisory body is the logical choice to unlock the most value through APIs. Companies in either situation should take a leadership role in setting standards quickly, together with leading international players. As illustrated by Twilio, cross-company processes to set standards must be reimagined and drastically streamlined.

APIs represent an attractive source of potential new revenue for companies, and recent activity suggests companies have just begun to explore potential applications. As the app market’s precipitous growth suggests, companies that get it right will benefit handsomely by developing next revenue streams.

This article originally appeared on Forbes