What Is An API Economy?

Today’s digital economy is shifting toward dependence on microservices—self-contained and reusable software components—working in coordination to compose the applications we use.

Communication between microservices happens through the application programming interface (API), which is how microservices expose their functionalities and allow access to their services and their data.

Many companies are now trying to build rich API ecosystems in data sharing, ecommerce, security, cloud and mobile applications—to name a few. This opens many doors of opportunity for both API consumers and providers, and this opportunity for innovation fuels what we call the API economy.

As we will see, the API economy is not a technical concept, nor is it a financial model. Instead, it reflects an ecosystem of mutually beneficial exchange of data and digital services.

In this article, we will explain in plain terms what the API economy is, how it affects businesses, and its benefits and challenges. We’ll conclude with some next steps for how you can get started in the API economy.

The API economy: a definition

The API economy refers to the controlled exchange of digital data and services through APIs. Such interactions allow faster product turnaround, increased consumer satisfaction and trust, access to newer markets, and enhanced collaboration.

Although an organization can be entirely API-driven internally, the primary focus of the API economy is B2C and B2B. A classic example is the cloud itself, which giants like Amazon revolutionized. The AWS cloud is nothing but a massive collection of APIs that offers access to the Amazon infrastructure and application resources.

Companies participating in the API economy build their services and products with an eye toward either (or both) of the following:

  • Consuming APIs from the marketplace to speed up the development of entirely new features and enhancements to existing features
  • Exposing APIs to add value for consumers, whether those be end users or other companies.

These companies focus on their engineering side while adding API-based features from a marketplace or partners, or exposing their APIs for use in the marketplace. Therefore, to participate in this economy as a technology-oriented business, you need to decide which of your digital services should be accessible through APIs, and how they should do that.

The effect of the API economy on businesses

A business can either be an API provider or an API consumer. Either way, it becomes a part of the API economy. One of the main effects of the API economy is how it levels the playing field.

There was a time when large companies could spend an unlimited amount of money to offer closed source services or the largest source of data, oftentimes locking in consumers to use their platform. In the API economy, successful companies integrate and utilize different data and services quickly and most efficiently. Small start-ups are now competing with large multinationals, and bigger players are acquiring individual apps because of their disruptive potential.

The value chain of the API economy not only exposes a company’s internal assets to internal users, but also to business partners, third-party developers or the general public. Businesses can now expand their horizon—their services aren’t just limited to their end users or end products. Similarly, when you adopt an API-first approach as a digital service provider, this significantly lowers the bar for potential users to integrate and consume your services so that they can increase their development velocity and thrive.

For example, let’s say your courier service company has developed an API that tracks the status of traffic lights at every intersection in major cities. This API provides that data to a specialized app used by your couriers, estimating approximate delivery times and sending personalized messages to recipients.

While this data on traffic lights is essential to your business, the data can be useful to other businesses as well—including ride-sharing, food delivery services, ambulance services or even law enforcement. Exposing your company’s API allows other businesses to build their own apps and reach a broader audience within those cities.

The digital-first approach is another classic example adopted by many state and central governments around the world. Most public services have internal systems for serving the public. Instead of building a full-blown digital platform from scratch to offer all those services, many governments opt to create an “umbrella” digital platform that consumes services and data from individual departments through APIs.

Benefits and challenges of the API economy

The API economy has both its benefits and challenges. Let’s begin with the benefits.

We have already discussed how companies can optimize their development efforts and reduce the cost to market when they use existing APIs. API providers, on the other hand, not only benefit from a favorable market reputation, but they can also monetize the usage, which sometimes leads to an entirely different line of business.

For example, an API provider can create a strong client base in the early stages by offering a free tier. After establishing a loyal following, it can offer value-added APIs using a revenue-sharing or subscription model.

Also, thanks to the API economy, there’s now a whole ecosystem of API-related products, tools, open standards and protocols. These are maturing as more and more companies are joining the API economy. Many robust API gateways are now available in the market, and various security applications now ensure safe and secure access to API endpoints. As the API economy grows, so does innovation in the API space.

The overall value created by APIs can sometimes be beneficial on a larger scale. For example, a consortium of banks may decide to expose some of their partner APIs for other financial institutions like insurance brokers or stock trading firms, often serving the same clientele. The end customers can get great value from such efforts.

In terms of challenges, most IT leaders are concerned with security. High-traffic public APIs are always prime targets for attackers and state-sponsored malicious actors. Poor coding, accidental exposure of credentials and the lack of updated SSL certificates can all lead to misusing an API for non-intended purposes or being made inaccessible with DDoS attacks.

Although APIs are language and platform agnostic, sometimes ensuring interoperability between different APIs can be cumbersome and cost-prohibitive. For example, an organization migrating and converting its legacy, on-premise SOAP-based APIs to cloud-based REST APIs may find that it has to rewrite the entire code-base.

How to get started

Aligning your business with the API economy is not as complex as it may sound. All it takes is a bit of planning and putting a few building blocks in place.

First, you need to confirm that your organization is ready for this shift. Your stakeholders need to understand the value proposition, and your company strategy needs to incorporate it as a clear goal.

Next, you need to find out if your application landscape is API-ready. Are you using only on-premise, monolithic applications? Is this older model mixed with the new model of cloud-native, microservices-based applications? If there are newer applications, then there may be APIs available for those.

Similarly, ensure your developers are comfortable building and reusing APIs. You can accelerate their journeys by adopting an API-first approach. With this approach, every development goal is to publish the final product as an API or build new solutions from existing APIs.

The API economy also requires you to prioritize the role of APIOps—a combination of DevOps and GitOps. APIOps aims to promote collaboration, automation and measurement throughout the entire API lifecycle. This lifecycle consists of different activities, including:

  • Design
  • Development
  • Security
  • Publishing
  • Scaling
  • Monitoring
  • Capturing analytics
  • Monetization

Those in an APIOps role in your company will work best when given the right combination of an API development platform, an API gateway and API lifecycle management tools.

Conclusion

If you are new to the world of APIs, you can start by reading our eBooks on APIs.

If you’re further along in your API journey, you may be looking for a robust technology platform for quick API development, easy deployment, reliable communication and simple maintenance. Kong offers an end-to-end suite of applications that caters to these needs. It includes the Kong API gateway, Kong mesh, Insomnia API design platform, and the Konnect service connectivity platform.

You can contact Kong to get a personalized demo.