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The recent constraints on brick-and-mortar businesses have pushed organizations to accelerate their plans for moving operations to the digital world — often shrinking timelines from years to months. In the process, APIs have emerged as the software products of the 21st century and new business models are blossoming. In our work with enterprises, we are seeing five key approaches to API marketplaces being increasingly used to power applications, services and connected devices.
Let’s first look at what it means for an API to be a product. Then, we will explore the concept of an API marketplace and the value it brings to organizations that implement one. Finally, we will look at approaches that organizations can use to take advantage of an API marketplace. To learn more about the five ecosystem business models, please refer to this webinar.
APIs: The Products of the 21st Century
The concept of an API has evolved rapidly. The first use of the term applied to code libraries that were used by developers to provide reusable capabilities. Over time, that usage has been overtaken by the idea of calling those code libraries reusable functions over the internet. The most recent evolution in APIs is the idea that these are not just technical capabilities but products — in the true business sense of the term.
What is the distinction between a product and simply a “reusable function?” A product has a specific value proposition that a particular audience is willing to pay for. Products have product managers, who perform all kinds of tasks — including doing market research, running focus groups, planning marketing campaigns, managing the lifecycle of the product from inception to end-of-life, etc.
APIs, as we know them today, were first offered by Salesforce and eBay around the year 2000. However, more recent companies like Twilio, Plaid and Checkr exemplify APIs as products more clearly. This is because these companies have led with API products as their only business model, rather than having an API as an adjunct to a web-based or physical product.
We can classify API products into two main categories: directly monetized and indirectly monetized. Directly monetized APIs (like Twilio) offer core functionality as a completely API-led product, and the business model is based around selling API calls. Just as mobile phone operators sell bundles of minutes and data, directly monetized API companies sell bundles of API calls, or simply charge per call. By contrast, indirectly monetized APIs are used to drive business to an existing business model. For example, eBay sniping engines help bidders make their bids at the last minute. These engines, such as Gixen, use eBay’s APIs to place bids. There is no direct cost to use these APIs, but the result is more bids for eBay — which drives its existing product (listing and selling fees).
We have seen the emergence of this world of API products in just 20 years — from the original XML APIs into Salesforce and eBay, through to multibillion-dollar companies like Plaid. However, the evolution of APIs as products is now going through another radical shift. We call this “federation” of APIs, because it enables multiple parties to participate in a shared business model. The key technology for federation is an API marketplace.
The Emergence of API Marketplaces
APIs are, on the whole, delivered from one business to another. Often, we call this model business to business to consumer (B2B2C). For example, Twilio allows companies to easily send SMS messages to their customers. So, Twilio lets Acme communicate with Acme’s customers. However, this connection is direct from Acme to Twilio. If Acme wants Twilio’s capabilities, the company goes to Twilio’s “API Portal” to register and subscribe to an API product plan. This direct relationship is now enhanced by new models, whereby multiple parties work together.
The shift is similar to one that occurred some 3,000 years ago when the Phoenicians, who came from modern-day Lebanon, started to trade all around the Mediterranean. They began by exporting their cedarwood to other nations by sea, but soon started to trade in other goods, making a profit as they bought and sold products from different nations and geographies.
While the development of traders and multiparty business models developed over thousands of years, we are seeing the emergence of new API-based multiparty business models in a very short time. All these patterns rely on the concept of an API marketplace that enables multiple parties to list and offer their APIs in a single place.
In our work with leading companies, there are five main API marketplace patterns that we see. Sometimes the marketplaces are directly monetized, other times indirectly. However, in every case, they pull together capabilities from multiple parties — and, more importantly, they enable each of those parties to succeed.
Six API Marketplace Strategies
These API marketplace approaches all demonstrate that building true ecosystems around API products can create new value, disrupt existing business models, and change the way we think about businesses working together.
Here are six strategies for API marketplaces that you can apply to become more competitive, more agile, and get ahead during the evolution of the API economy.
- Understand your ecosystem. All of the examples come from a true understanding of the ecosystem in which you operate. Mapping out your B2B, your B2C, and your B2B2C channels and ecosystem will create a basis for applying new business models. How can API products improve the ecosystem? Perhaps you will identify a 6th, 7th, or 8th new multiparty model for APIs! Please let us know if you do.
- Treat APIs like the products they are. Don’t make the mistake of treating APIs purely as technology and technical capabilities. APIs should be designed and managed as true products — which are reproducible, fungible, and reliable — and not merely to expose systems. Build out the capability to apply product management skills to APIs: understand your customers, run focus groups, monitor usage, and track your competitors.
- Build a true marketplace, not just a portal. A marketplace is much more than a developer portal. It should give the means and mechanism for a diverse group of independent actors to design and publish APIs. Additionally, it needs to provide tools, documentation, and incentives such as monetization — as well as support activities like evangelism. Above all, it enables federated API models.
- Simplify the management of services. This is achieved by giving responsibility to each participant and letting each group publish and manage API products independently in the API marketplace.
- Share the value with the other parties in the ecosystem. A key question that drives all of the models we have looked at is: “How can you create value not just for your own organization, but also for your partners, customers and maybe even competitors?”. No marketplace will succeed unless it benefits all participants.
- Foster diversity. Consider taking inspiration from biological ecosystems. Studies in biology [1,2] show that ecosystems with high biodiversity are more productive. We believe that the same is true of business ecosystems — and building federated API marketplaces that encourage diversity will strengthen your ecosystem.
We hope this article inspires you to think about API products and business models in new ways, and to innovate new business models of your own by creating ecosystems with API marketplaces.
 Balvanera, P., Pfisterer, A.B., Buchmann, N., He, J.S., Nakashizuka, T., Raffaelli, D. and Schmid, B., 2006. Quantifying the evidence for biodiversity effects on ecosystem functioning and services. Ecology letters, 9(10), pp.1146-1156.
 Duffy, J.E., 2009. Why biodiversity is important to the functioning of real‐world ecosystems. Frontiers in Ecology and the Environment, 7(8), pp.437-444.
Feature image via Pixabay.