APIs are everywhere. Each time you click a Facebook “like” or “log in with Google” to an independent website you are interacting with an API. Simply put, APIs – application program interface – are a means by which software applications communicate with one another and exchange data.
Understanding APIs was once the responsibility of software engineers and the lower ranks of IT management; for many businesses, they were an afterthought. Not anymore. Attitudes are changing at the top of the organisation, according to a new report from The Economist Intelligence Unit, commissioned by Telstra.
Plug in to the API economy
Automated data sharing is a central feature of multiplayer innovation
Written by The Economist Intelligence Unit
Nowadays a powerful API—and a solid API business strategy—is a must-have for business wishing to innovate in the digital economy. Data sharing through open API’s is a central feature of many multiplayer, cross-industry partnerships profiled in the report. These range from smart city networks with hundreds of collaborators to an open innovation platform for large banks to work with fintech start-ups.
Before APIs were prevalent, connecting two pieces of software involved building one-off connections between them. This greatly reduced the number of such connections that were made; it kept software applications siloed—both within an organisation, and among third parties; and it left a bare minimum of collaboration and sharing.
APIs allow software developers to standardise how an application or operating system works, making it much easier for others to connect with it. An API for a given piece of software specifies what data is made available and what functionality it has. Simply put it tells other applications what rules they must follow to interact with its data and functionality.
Standard operating procedure
In many cases, APIs are used internally to facilitate interactions between different applications produced by the same organisation. When Google, for instance, builds a mobile phone application for Gmail, it relies on its core API to draw data from its central databases whenever a user wants to read an email. But it is growing popularity of public APIs, and the ease by which they can be combined, which are exciting so many and creating hype about a so-called ‘API economy’.
With a clearly documented and useful API, a company can open up its data—in the manner and to the extent that it chooses—to others. Third parties, including individual app developers, startups and the largest commercial enterprises, can then access code features and data easily, without having to have intimate knowledge of the software or full access to the code.
This allows developers to build applications that interact with and build upon software in different ways. If you are a software developer who wants to build an app that shows nearby restaurants, you could use Yelp’s API or Foursquare’s API to pull in restaurant details. You could combine this with Facebook’s API on likes and shares to create a simple application showing what nearby restaurants your friends like. As more companies open themselves up to this kind of collaborative innovation, the connections and possibilities expand exponentially.
Return on innovation
Many technology platforms typically give away access to their API at no cost. A company can spread its reach by allowing software developers to use its API. The pay-off is often bringing users back to a core product—as is the case with the likes of Apple, Google, Facebook or Twitter. Others target the greater resources of the crowd. Public sector organisations often have vast amounts of valuable data but lack the wherewithal to make full use of it.
London’s transport operator, Transport for London (TfL), has adopted a strategy of openness with its data. Its highly functional and data-rich API provides third parties with access to real-time information about the movements of its busses, trains and tubes, including schedules and disruptions. As a result, third party developers have created hundreds of applications that build on the data in ways TfL may never have realised—all to the benefit of London’s transport users.
Likewise, companies now have vast amounts of valuable data but sometimes struggle to make full use of it internally. Managers should explore the potential value to their organisation of allowing internal and external developers to put it to greater use, especially now that a lack of resources is no longer a valid excuse.
Nonetheless, APIs do not always have to be open source. Some developers pay to use an API or the data provided through it—typically on a ‘metered’ basis. PayPal, for example, charges for access to its public payments API, for example, with a transaction fee docked against each payment made through it. Conversely, a company may decide to pay developers to use their API: Amazon compensates external developers for every referral to its website through its API.
For other organisations, APIs are core to their business model. Twilio, a US-based online communications company, provides a service that allows partners to send and receive voice and SMS communications. When a user of the Uber taxi service receives a text message saying that their driver has arrived, that functionality is powered by the Twilio API.
Meanwhile, at Salesforce, more than 60% of its traffic arrives through APIs. Over 800,000 developers have built more than four million applications that run on the company’s platform. More than half of its total revenue comes via these applications, according to the company.
In any case, whether the model is free or fee-based, APIs are set to keep growing in importance. According to a survey of global executives, conducted for the EIU report mentioned above, the best innovations in their respective industries will more likely originate over the next three years from cross-industry partnerships involving multiple organisations as much as traditional R&D from single industry players.
For these collaborative initiatives to really take off, companies will have to overcome commercial reservations about sharing data, alongside related internal concerns around security, risk and compliance, which remain prevalent. Many are addressing these by carefully separating the data they wish to share and the data they need to ring-fence—with the help of APIs. With an abundance of easy to use, strong and well-documented APIs supercharging the rate at which companies connect, a flourish of digital innovation looks set to follow.
 In June 2015 The Economist Intelligence Unit conducted a global survey, commissioned by Telstra, of 1,045 senior executives from 20 industries.