What do Uber (taxi services), Airbnb (lodging services), Facebook (social networking), Alibaba (e-commerce), and Paypal (online payment) have in common? The obvious things include: All of them drive their core operations on internet platforms and have astronomically high valuations without any notable physical assets. Not so apparent, however, is the fact that they excel at using Application Program Interfaces (APIs) to drive competitive advantage. As we highlighted in an earlier article, APIs are a technology that allow firms to interact and share information with other firms at an unprecedented scale, taking advantage of the far-reaching progress in digitization and the rising influence of software in our day-to-day lives.
It is true that all the companies mentioned above were born in the digital age and were primarily conceived to create competitive advantage from informational assets. But such opportunities for competitive advantage are now becoming available to all companies.
firm can use its customer touch points to collect information using software systems.
In fact, many companies already do this, but do not recognize its full potential. For example, they frequently choose to use that information purely as an internal asset and seldom allow third parties to build complementary services on top of their data. The adoption of APIs is changing that trend, opening new avenues for building advantage and pursuing growth. The arrival of API-management in companies such as Apigee, CATechnologies, IBM, 3Scale, and Intel has hastened this adoption.
How do the exemplars use APIs for competitive advantage? We see four key approaches.
Use APIs to build enormous repositories of information on customer behavior. Every time a user interacts with these companies’ platforms, cleverly designed APIs absorb helpful information. Uber, for example, knows where its consumers are at any given time before and after a ride. It also knows where they live, work, or make social visits and can complement this knowledge with rich stocks of information on drivers and their availability. (It’s so rich that the company had to deal with questions around privacy after some recent press over its “God view.”)
Exploit the repositories to predict consumer behavior. Based on information available on social networks like Facebook, apps can now predict when and to whom a user is likely to get married. Similarly, Pandora can predict gender, age, and political affiliations based on music tastes. Such predictive powers understandably give these companies a significant advantage in attracting advertisers. And as these repositories grow over time, so do their value and exclusivity, making it hard for competitors to catch up. APIs hence draw and accumulate informational assets that can provide astonishingly more value than physical assets in this digital world.
Employ your API to sustain your competitive advantage. The front end of an effective information-collecting API is a dominant user interface (UI) that enables a platform to gain strength through network effects. Facebook, for example, becomes more valuable to a user when he or she finds it more likely to connect with a friend on that platform. This, in turn, attracts more users and, as a consequence, allows it to expand its repositories of information. Dominant UIs and their associated network effects thereby help platforms sustain advantage by retaining users and consequent sources of information.
Yet maintaining a UI’s dominance often can be challenging. For example, pay platforms such as ApplePay and Google Wallet and retail consortiums such as CurrentC are already posing serious challenges to PayPal, one of the current market leaders.
Astute digital companies use APIs to surmount these challenges. Netflix, for example, initially opened its APIs to make its services available across several alternate platforms such as internet-ready TVs, tablets and smart phones so it could cater to consumer’s individual preferences.
PayPal doesn’t but could also make its services accessible across competing formats. Irrespective of which platforms, technologies, or UIs achieve dominance, PayPal would then still be able to serve as a service provider. It would allow those platforms to use its accumulated informational assets and would be able to accumulate information through them.
Explore growth opportunities by employing your API to expand your ecosystem and the scope of your platforms. Uber, for example, already uses the information it collects in its taxi services to participate in the food-delivery ecosystem through UberFresh. Through APIs, Uber has channeled it core skills in dispatch and spot pricing into a new ecosystem where an entirely different set of participants offer services such as food preparation and restaurant ratings. UberRush, a package-delivery service in New York City, uses similar principles. Airbnb, the accommodation platform, could do the same and move into travel by partnering with museums, theme parks, movie theaters, and so on.
But when pursuing such opportunities, it is important to consider how users will react to your company sharing their data. You can either get permission from users or just provide aggregate information to third parties.
The skyrocketing valuations of companies that excel in exploiting APIs demonstrate the modern day power of informational assets. By incorporating APIs in their strategies, many other firms could follow in their footsteps.