Back in January, Forbes contributor Louis Columbus predicted that 2017 would be “The Year of the API Economy”. When you look at the investments being made into APIs, this reality is hard to ignore. There are big investments made by organizations into APIs, be it internal or external APIs, and upper management will face pressure to come up with new and innovative business models around the digital API economy.
APIs are increasingly being explored to address top strategic priorities like business agility and customer growth. Today, it is estimated that the number of public APIs is over 50,000. Programmable Web lists over 17,000 public APIs in its database.
This does not include the thousands of privately managed internal APIs, which continue to gain adoption across major industries around the globe. According to SmartBear’s 2016 State of API Report, 1 in 5 API providers only began developing APIs within the last five years alone.
API adoption is only set to increase with the exponential rise in the number of connected devices. The IoT revolution is also upon us, with home devices, bots, and wearable devices all contributing to our growing desire to stay connected.
By 2020, it is estimated that every person in the world will have seven devices, on average.
So, What Are the Different API Business Models?
With the proliferation of APIs across so many platforms and industries, companies are understanding what are the best API business models they should be investing in to take advantage of the API Economy.
In order to drive the API initiatives of an organization, it’s important to start thinking of APIs as regular products.
This is also why CIOs and CTOs are encouraged to recruit dedicated API Product Managers who can really understand and execute on the various business opportunities APIs can open up. If you are on your journey of figuring out business models for your business, we also recommend reading this post.
Today, there are two primary, high level models organizations take to fuel strategic growth with APIs — the closed, partner-only API model, where only partners of the API’s owner can access and consume the API, or the open, public model, where anyone in the general public can access and consume the API, usually for a fixed number of transactions.
There are also internal APIs, which are maintained privately within an organization and aimed at accelerating and integrating internal units and processes.
Closed Partner-Only Model
A partner-only model relies heavily on handcrafted relationships with your business partners to use the information provided with your API. It allows for a much more controlled exchange of data, which makes for an easy-to-monitor API program.
It’s expected that API partner programs will have multiple tiers of access, which allows for up-sell and enables you to derive greater value from your organization’s information store.
Amazon Web Services Partner Network is a great example of this type of program, which offers various tiers of service to partners, based on their status.
The success of this program is dependent on identifying the best engineering and strategic partners within their API ecosystem for the business to leverage.
Benefits of a partner API model:
- Monetize information: A partner model is a quick route to monetizing the information your organization has available, by providing access to partners that you already have an established relationship with.
- Better control and maintenance: It’s much easier to provide a more tailored experience to partner companies, especially paid partners, because there’s a limited set of partnerships.
- Helps existing partners: It also benefits existing partners, allowing them to access better information, providing more incentive for companies to get into a business relationship with your organization.
- Opportunity for structured growth: Partner programs provide an incentive for companies to promote your products.
Examples of this kind of model include:
- Uber: The company pays a partner organization a bounty every time someone signs up for an Uber through the partner’s application
- Amazon: The Associates Program of Amazon allows the partner organization to get a share of the profit every time they drive sales to the company
Open “Public” Model
The open, public API model allows anyone in the general public to access and consume the API. Usually, there is a limit to the number transactions per unit time.
The most common example of this model can be seen in social media APIs provided by organizations like Facebook and Twitter.
Public APIs are regulated by the number of calls that can be made per unit time. For example, the YouTube API has a limit of one million calls-per-day. Anytime you exceed these calls, the organization or individual integrating with the API will have to pay a fee.
Since a public API is open for anyone, it requires support from a good API management solution, either built in-house or from a reliable API Gateway vendor like AWS, IBM, or Microsoft.
Issues like rate limiting and monitoring are important to ensure that your API, and the information you provide, is not misused or exploited. It’s also important to ensure that your public API can scale and handle high volumes of traffic flexibly.
Benefits of a public API model:
- Opportunities for innovation: An open API also enables third-party developers to create a rich and broad range of value-added products, that improve on the original functionality of your services. Twitter, for example, has clients, bots, and analytics tools built on its API.
- Market expansion: Public APIs can open business opportunities that are otherwise not accessible via traditional business strategies. Providing services via a public API enables many startups to compete against more established players by being available 24/7 (in a global market), with a ready-to-use service.
- Increased platform awareness: A public API program helps in spreading awareness about your product, and allows more products to rely on your services. Facebook, for example, has become the number one identity management solution, with mobile and web apps enabling users to sign up with their Facebook account, promoting the usage of Facebook in the process.
Examples of this kind of business model are –
- Google: Google is famous for having its products, like search and maps, integrated across a multitude of external applications, through their external API. This allows Google to grow and reach new audiences on a regular basis
- Last.fm: The company has an external API that allows users to develop music programs on top of them, permeating across different applications
It’s important to understand the full requirements and objectives of your API initiatives before embarking on investing in the API economy.
There are a lot of opportunities in the API economy, and companies need to adopt a monetization strategy that fits their industry and use case.
Want to learn more about adopting an API business strategy? Check out our latest eBook: How to Optimize Your Swagger Workflow for Today’s API Economy.