API Business Models – How to choose the right one for you?

Business Strategy to drive the API

Many companies are embarking on initiatives to open their API. However, most API initiatives still do not fully harness the real potential that an API brings. Sometimes this is due to organizational reasons – such as being run as a side project in the engineering team. Often though, it is because of the lack of a rigorous process to ensure that all the creative options are investigated on how to adapt the business model. It is like getting into a car and just following the road ahead; instead of checking a map to see where you want to go and which the best route to take is.

The objective of this article is to define a structured approach to identify which business model will ensure that your API makes the most effective contribution to your business. Before we get to the meat of the business model options, the first step is to decide which your core assets are, and how you want to leverage them in your strategy. When you open your API, you can think generically about core assets in terms of Presentation, Logic or Data assets.

The API Business Model Triangle Framework: Presentation, Logic, Data

Presentation assets are the user interface or visual front-end to an application. Logic assets are the algorithms, analytics or services which take data inputs, do some processing and provide a response. Data is the raw content but can also include simple transformations of the content. Different services can be linked together to provide a complete application system.


It is important to break out of the mind-set that your company has to deliver all three assets. It is true that traditionally the only way to deliver applications was for a company to own responsibility of all three. However the World Wide Web and APIs liberate companies from the need to deliver all three. Now more and more companies benefit if they focus on their unique value-add. Once you identify your core assets, it becomes clear which complementary assets will be provided by your partners. Thus to reach a strategy you are satisfied with, follow the simple steps:

  1. Identify your own core asset(s)

  2. Choose the complementary asset which will deliver most value

  3. Define the strategy to capture the value most effectively

For example for Twitter the core asset that they distribute via their API is data, in the form of the immense stream of 140 character tweets. They made a decision early in the company history to focus all their resources on this core asset – notwithstanding recent strategy changes where they are trying to re-assert control of more of the Presentation and Logic assets. This means that with the original strategy the complementary assets were Presentation and Logic assets. In these two areas the company would build partnerships to deliver enhanced solutions to meet the diverse needs of Twitter users – a far greater variety that Twitter alone could ever deliver.



API Business Model: Core and Complementary Assets


Let us say that of the two complementary assets, Twitter decided to focus on Presentation, because they realised that it is critical to get mobile client coverage. Then the strategy definition was to “power mobile apps”. The company defined the specific APIs and a business model that would attract developers to create new mobile front-ends for Twitter. An example of a Twitter partner that leverages the API to deliver a mobile client and fulfil this strategy is TweetDeck:



The Business Model for Twitter - TweetDeck

API business strategy examples

In the following table are examples of how several companies’ strategies could be analysed using this framework:


Company

Presentation

Logic

Data

Strategy
Indeed Aggregate job search
Netflix Deliver new ways to watch and choose movies
Twilio Outsourced telephony functionality
Wolfram Alpha Bring computational knowledge to apps anywhere
Infochimps Access big data without the big data hassle
The Guardian Expand the reach of content and engage users

Note that the highlighted boxes are not the only assets that the company provides, but rather they indicate the most important, or core asset. The remaining two are candidates for complementary partners, even if there may be some level of “co-opetition”.

Business Model options with an API

Once the strategy is agreed, you will find that the use of an API opens up new options in the choice of business model. For each potential business strategy you need to evaluate which is an appropriate business model to execute. The options related to APIs include:

  • Product / Service: if the main way for the company to deliver value is through its API e.g. Twilio from the table above.

  • Distribution: to extend the company’s reach, the API allows the company’s content or services to be accessed from other applications or devices (such as smartphones). This could be in the form of a channel business model, but it may simply be to broaden access via partnerships. There are several options for monetizing the channel option including product resale, whitelabel licensing, or affiliate commissions. An example of this is Wolfram Alpha’s partnership agreement with Microsoft’s Bing search engine.

  • Promotion: if an important role is to raise awareness for the company’s products or brand, and generate additional traffic. This is the business model used by Netflix and The Guardian for movies and news content respectively.

  • Content Acquisition: to make it easy to gather content which will then form a strong base for the value of a company. An example of this when job posting websites cross-post job openings to Indeed via their APIs.

  • These business model options are not exclusive. In fact the presence of an API will usually mean that several of these are achieved. A good way to think about it is to choose one focus area for the business model, and additionally one or two supporting areas. We will elaborate on some detailed examples later. A related choice to the business model is to identify how directly the value of the API will be monetized. This is typically not a black-and-white decision, but rather there is a spectrum of possibilities. The following table gives examples at several points along the spectrum from very direct pricing based on API calls, to completely indirect value capture.

    Correlation transparency of revenue to the API: Direct

    High
    Indirect

    Low
    Typical pricing drivers: Number of calls to API Transactions implemented through the API Affiliate model or other indirect revenue model Increased awareness/leads or better functionality/ content
    Example: Xignite Paypal Indeed Facebook

    We have now seen a framework to evaluate the best business model options for your API. It began with an assessment of your core asset to determine what strategy will guide your API. Then you explore four different directions for business models to find which is the best fit for your strategy. In parallel with the business model evaluation, you can optionally define some high-level pricing approaches. In the next post in the series we will look at each of the four business model options in more detail, before applying this framework to a number of existing companies to show how these business models look in the real world.