API-first architecture is an approach to software design that is centered on the API to make it easy for applications and services to interface with each other. If we really simplify, it is like having a ‘socket’ in the service that other services can work with. API-first is also a business approach, enabling developers to build applications on other services and enable others to use your services in their applications. API-first has been a popular approach in designing services for a few years now; however, in many services it is not a reality. It is a strong concept for building successful future services and applications.
Economic significance of API: theory and practice
A research paper published several years ago demonstrated that APIs have a real impact on companies’ business success. The paper concluded “that firms adopting APIs see increases in sales, net income, market capitalization, and intangible assets. API use also predicts decreases in operating costs in some specifications. The extent to which API adoption is linked to this outcome is sensitive to the econometric specification.” The authors of that paper also found that API adoption was strongly related to increases in net income and operating income and that the most significant relationships turn out to be between API adoption and market value.
It is not enough merely to have API’s; instead, what matters most is the ability to properly design those APIs so they can actually support integration to other services. For example, Slack’s API design guidelines give very practical instructions on how to make good APIs. They also illustrate that the devil is often in the detail. Hence, you must think carefully about which services you would like to offer over APIs, how you offer them, and even how you support error issues.
We have quite a lot of help and guidance on how to make the API-first approach work but it doesn’t mean that many companies have actually adopted the API-first approach. Even if they have taken it, their APIs are not that useful in reality. Then we have regulated interfaces, such as the 2015 EU Directive on Payments and Services (“PSD2”) in banking and electronic health records in the European Union. Yet many of these are quite limited and difficult to use.
Business opportunities with the API-First approachSurprisingly, many companies are still of the opinion that an API is a risk or a mandatory component. Few companies really seem to look at it as a business opportunity. For example, if they open an access point to their data, they think that other parties could make something better with the data than they can. And vice versa, some companies hesitate to build services on other companies’ API’s and prefer to manage the whole stack themselves.
Let’s look at a couple of examples.
Several years ago, we founded an API-first finance back office as a service company, Difitek. In many ways it offers a really attractive model to build financial services. Its cloud based back office offers many functions such as banking IT and beyond. It offers functions to manage KYC, loans, investments, account management and many other finance functions. However, we have seen that for traditional finance service providers it is difficult to use external services, even though they see cost benefits, see how it can accelerate new service development and improve customer experience. Many new fintech companies want to build their own stack, not build on external API’s, especially when they think it is important to own intellectual property rights to their technology.
Another example is wearables and their data. Some wearable devices offer quite nice APIs to collect data and then utilize the data elsewhere. But many of them don’t yet offer an API, or the APIs are hard to use in practice. Most stakeholders in the wearables industry agree that it would be advantageous to combine data from different sources and to have a more open market to develop apps on data. Furthermore, the use of wearable devices would increase if the APIs to utilize wearable data were more open.
Paths towards opening the API ecosystemAs a whole, it looks as if many players see the value of API’s. However, most of these market players don’t want to be the first mover. They believe they don’t want to open anything until other parties do so. At the same time, business history has shown us time and again that it is generally not a smart strategy to try to delay an obvious change and act only when it is absolutely mandatory.
We have, of course, many good examples of where the API-first model already works. Stripe is one of the most valuable fintech companies and it is very much an API company. Twilio is another good example. We could also mention companies such as Shopify, Okta, and Square. We can clearly see the API-first model as a good business itself. Public sector companies with open data has also demonstrated the value of APIs.
The API-first model offers significant business opportunities. Nevertheless, businesses need more courage to actually adopt the model. Many companies believe that it is safer to offer their own services and at least limit the openness and APIs to a minimum. It also requires companies to really know their own business model and to disrupt the market with it.
The future belongs to those who really are able to offer and use APIs and build their business on it. Delaying an inevitable change is never a good idea.
Smartwatches are making an impact on the watch market. Watch enthusiasts favour traditional watch brands, ‘mature’ buyers and those who need to show off their wealth. Younger generations tend to go for smartwatches. Smartphone brands have been highly successful in the smartwatch market, but traditional watch brands haven’t been successful in the mobile phone business. Even Vertu that targeted a luxury brand position, failed.
We also don’t see jewellery companies coming to challenge Öura in the ‘smart ring’ business. So, why is it so difficult for luxury brands to be successful in the tech business? Could some changes in the tech service market change that situation?
Why are smartwatches mainly coming from Apple, Samsung and wearable tech companies like Fitbit, Garmin and Withings, rather than the traditional watch brands? Is it linked to the technical development and disruptions in the market that state-of-the-art technology inside devices is more important than brand status? Or is it that digital products makers find it more challenging to become status symbols because their customers go after price, usability and usage value?
An access device is a tool with little intrinsic value in itself. With digital products, the value is really in the Internet, cloud and associated services, not the device itself. The device must offer almost invisible access to the service. That is why Apple’s most significant value has been a seamless user experience; why Amazon offers its tablets for a very low price, and why Google tries to manage software on all devices.
People also look for different kinds of experiences with luxury products than daily tools. One learning is that luxury products are typically designed for a particular need, not packed with multi-function technology. Luxury products like expensive watches, coffee machines, pens and supercars generally are for specific situations and do not compete with products for regular everyday use.
But very specific functionality is not enough if people start to expect basic smart functions for all devices. For example, people expect to get their exercise (e.g. steps), heart rate and sleep data from every watch. This means those functions are no longer something extra but the basic functionality they expect to get from any watch they buy.
Any watchmaker could quite easily add sensors to measure movement, heart rate and sleep. Those sensors are becoming a commodity. The complex part is to build the complete service and infrastructure for it. The data must be collected from the watch and stored, and the data must be organized, analyzed, and presented to the user. The user needs an application to access, utilize and analyze the data. Brand companies need to invest heavily in infrastructure, software development and data analytics to compete. It is not a one-time investment but one that would require continuous maintenance and development of the services.
Now, these devices and their data live mainly in their silos. Apple Watch, Samsung Watch, Fitbit, Withings, Oura, Garmin and many other devices have their data formats, data storage, services and apps to use them. It is a device-specific vertical market, and you need all components from the same manufacturer. But maybe there could be an alternative?
Suppose data from various devices go into the user’s one data storage. In that case, it can combine data and have an open API to develop applications, making the whole wearable market very different. It also makes the role of brands very different. When we get more horizontal layers for the wearable market, it will be easier for other brands to come to the smart wearable market.
Suppose you are a Swiss watchmaker or a Milan-based fashion brand. In that case, you can easily add sensors to your watch, shoes or clothes, with data collected to the user’s database, and there are many applications to utilize the data. This is a much smaller and easier investment for brands rather than building the whole infrastructure. People could then buy or use several different branded products, and the same data and application model would work for all. There would be an army of developers making apps on the API and updating them when new devices, versions and clothing come to the market.
This model would be of value for houses of brands that cannot compete in the wearable data and app business market. For obvious reasons, tech giants like Apple and Google won’t particularly like this development. It is also a risk for brands to rely on Apple’s or Google’s services and become dependent on them.
I wrote earlier that the wearable market is like the 1980’s computer market or 1990’s mobile phone market. Then the software started to dominate the market. When software and data analytics capabilities begin to dominate the wearable market, it will change the market significantly. There might be a few software vendors and data infrastructures that come to dominate the whole market. Or it could be a more open user data-driven infrastructure that is open to all devices and application developers. We already know that most cannot create their complete infrastructure and choose between tech giant’s walled systems and user-centric models. Brands must also make a realistic evaluation of which model they want to support to survive and succeed.
Est. 2009 Grow VC Group is building truly global digital businesses. The focus is especially on digitization, data and fintech services. We have very hands-on approach to build businesses and we always want to make them global, scale-up and have the real entrepreneurial spirit.
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