August 01, 2012

APIs: The New Source of Competitive Advantage

 

What makes a firm stronger than its competitors? Many things, of course: better products, better distribution, a better brand, more efficient manufacturing, and so on. But in the post-website, apps-everywhere economy, one technology powers all of these.

That it goes by the cocktail-party-conversation-killing name of “application programming interface”—or its equally unsexy acronym—is unfortunate (not least of all for those of us in the API management industry). But that doesn’t change the important new reality: APIs are now the primary source of competitive advantage in business.

Skeptical? Drop in on a business school lecture about competitive advantage, and you’ll hear about Porter’s five forces, the framework conceived over 30 years ago by Harvard Business School professor Michael Porter. Porter initially proposed the five forces to evaluate the attractiveness of an industry, but firms also use them to understand the sources of their competitive strengths. I’ll use them to illustrate how APIs are the most important new driver of competitive advantage.

An API creates advantages through each of Porter’s five forces in so many ways that it would be impossible to list them all. So here are one or two for each:

1) Bargaining Power of Suppliers With an API, firms can open new opportunities for suppliers that simultaneously reduce suppliers’ bargaining power. For example, firms such as Facebook, Salesforce.com, and Twitter allow suppliers to build services for end users. These suppliers (OK, these days we call them “platform partners”—Zynga, for example—but make no mistake that, from Facebook’s point of view, they’re still suppliers) often enjoy more brand presence with the firm’s customers than traditional suppliers. But they are also bound to the firm in ways that strengthen the firm’s bargaining power (Zynga’s dependence on Facebook).

2) Bargaining Power of Customers Firms can use APIs to enhance their power with both wholesale customers (channel partners) and end users. Firms can make wholesalers more profitable (and, therefore, more dependent) by sharing critical information through APIs. For example, an office machine manufacturer can expose real-time pings from its copiers through an API to resellers, empowering those resellers to sell replacements or repairs. APIs help firms delight end users by making it easier to group together (OK, mash up) existing services into cool new ones. (For an eloquent explanation of how that works, see Steve Yegge’s now-famous rant, which is really about why APIs are the source of digital age competitiveness.)

3) Threat of New Entrants An API can make a firm ubiquitous faster. Thanks to Netflix’s API, the digital movie brand’s service is present on a range of consumer devices that includes Sony PlayStation, Microsoft Xbox, and Roku. Of course, ubiquity has always been an important competitive weapon, but achieving it used to be a physical challenge (building stores). Now, it’s a digital one (getting into apps and on devices). There’s no better tool for lowering barriers to digital distribution than a robust API.

4) Threat of Substitute Products Because an API makes a firm’s products extensible, the firm is less likely to be blindsided by out-of-left-field substitutes. That’s because an army of partners and customers—not to mention the firm’s own developers—can more easily add new features that keep the firm’s products evolving. Take Expedia, which now does over a billion dollars in affiliate revenue through its API. When a group of Wharton Business School students came up with the idea for the social travel-booking site Gogobot, they used Expedia listings—through the Expedia Affiliate Network API—to power it rather than build their own. Its API increases the odds that Expedia will enable and profit from innovation rather be supplanted by it.

5) Competitive Rivalry within an Industry We’re quickly moving into a world in which developers (read: anyone building anything that’s connected) will be able to swap out one API for another. Look what happened when Google began charging for Google Maps access: publishers turned to substitutes, and Google had to lower its price to stay in the game. The richness, affordability, flexibility, and ease of use of a firm’s APIs will determine whether it gets to play in the online ecosystem or not. Like I said, these are just a few ways that APIs power competitive advantage.

Any others you’d like to share? If so, post them in the comments below.