One of the world’s largest online API events – APIX – was recently organised and hosted by connectivity and integration expert, Sensedia. Run over three days, APIX attracted some of the world’s leading tech specialists and strategists, all keen to share their perspectives.
Here, Sangeet Paul Choudary, international best-selling author of Platform Revolution and an advisor to leadership of more than 50 of the Fortune 500 firms, explains how key supply and demand components were first digitised, the role of platforms and APIs, their work in transforming business and industry competition and how they create new value to organisations.
When we think of digital transformation we often consider changing the enterprise, the backend systems, to become more agile. Yet when we really think about the value digital transformation brings, the focus should be on how data impacts business models and how the creation of digital markets unlock new value.
Consider the evolution of the internet and technology over the past 20-25 years. Every time a specific component or variable (denoting market supply or demand), was digitised, it facilitated a whole new range of interactions which in turn supported the creation of entirely new markets and new companies unlocking this new value.
In the late 90s, companies like Amazon were digitising consumption for the first time. Before this, consumption was captured in the form of a sales receipt and it was never used to create value back in the business.
Amazon used purchase data and collaborative filtering to create new market interactions such as ‘people who bought this also bought…’, prompting people to make other purchases. This consumption data started unlocking new value.
The early 2000s saw the rise of social networks, but identity was still not verified on the internet, meaning it was difficult to create trust. Facebook digitised identity so it could be verified and used to create trust and market interactions.
In 2008, Facebook Connect allowed users to log in and verify their identity via a company or university email which supported real time transactions. And because identity could now be digitised, it prompted the rise of the so-called sharing economy and of companies like Airbnb.
Around the same time, another important development was Google’s acquisition of Keyhole Technologies (eventually Google Maps) and the emergence of the Cloud.
In 2007, 3G connectivity became more powerful and Apple used this to launch a smartphone that combined a pocket computer with digitised location services owing to the now mature Google Maps. This prompted the rise of location-based services such as Uber, where a digitised moving car could be connected and matched to a location-identified request for a ride.
When a new component is digitised it creates potential for new market interactions, unlocking value in the digital economy.
Digitising the value chain
Over the last 7-10 years, there have been several new forms of digitisation:
- Reputation – important if hiring someone remotely
- Machine performance – digital twins of machines are created and the data they provide gives an overview of the entire industrial process
- Workflow/business processes – as silo-based software moves to the Cloud, it can interact and connect with other Cloud-hosted software.
When combined, these three elements – humans, machines and processes – align activities, digitising entire industrial systems.
It’s common to have digitised machines programmed to collect and generate data. Used by workers with workflow management tools, the machines can interact with external processes in other companies, further digitising the entire value chain.
And this is where the power of platforms and APIs lie; once we start digitising supply and demand and every value-creating component in the value chain, we can restructure entire business models.
As processes start being digitised, creating new value, specialized firms performing only one function in the value chain are increasingly emerging. They convert their core activity into an API so it can be embedded into other companies’ processes.
Smartcar, for example, digitises every function of the car, enabling developers to access its data through APIs. Entire companies can be built around the creation of this micro-value which essentially is unbundling and developing a unique single-value proposition.
Historically, multiple products and parts of the value chain were vertically integrated, similar to a pipeline, and all the elements – infrastructure ownership, product creation and customer service – were managed in-house. It was a very linear flow of value with end-to-end pipeline management; create the product, ship to the customer and the customer pays.
Increasing digitisation, connectivity and data enables powerful companies to leverage a platform-based model where the platform creates a central infrastructure for external parties – producers and consumers to connect to. As they create and exchange value with each other, the platform business itself is not the sole creator of the products and services.
The role of the platform is to provide the central infrastructure, set the terms of governance re: what interactions are allowed and encouraged (and which ones are not), and facilitate entirely new markets of value creation at various points in the value chain.
Instead of owning the whole value chain through vertical integration, companies now provide open infrastructures for players to plug in and interact with each other.
The network effect
From a business perspective, platforms generate a ‘network effect’, creating more opportunities. When more producers plug into a platform, the supply choice increases, attracting more customers. As more consumers join, the platform’s value as an influencer and communication channel increases, prompting more producers to join. As greater numbers of consumers and producers access more of the market, the platform increases in value.
There is however, a flip-side to the platform economy. When more providers bring in more data to the platform, which it accumulates and benefits from, increasing data accumulation creates greater stakeholder dependence on the platform.
Platforms do not just create value, they increase data concentration. That’s why the biggest and fastest growing companies in the world today adopt platform business models.
But, the single and least understood aspect of the platform economy is that with all forms of openness, a new form of control is required.
Open v control
Android started as an open ecosystem where third-parties could create new phones (unlike Apple). Android quickly realised there was a price for openness; a lack of control.
By being open, Android allowed companies such as LG, Samsung and Amazon, to ‘fork’ its operating system and create their own version of an Android ‘app store’, shifting power in the value chain away from Google (forking takes the source code from a software programme to develop a new one).
This prompted Google to set up new control points, particularly as it knew Google Maps was a powerful ecosystem asset (phones and self-driving cars need mapping for navigation).
Google removed maps from the Android infrastructure and contained it within its enclosed Play System, requiring partners, such as phone creators, to licence Google Play. Partners also had to join the Open Handset Alliance which prevented them from setting up their own app stores.
The impact of APIs
APIs remove and change business boundaries. Traditionally, the cost of managing activities externally was prohibitive which is why companies handled everything in-house. But digitisation has reduced these costs, and today companies can sign-up to APIs and benefit from the expertise of specialist firms.
Start-ups for example, focus on one part of the value chain and expand from there. Specialisation is replacing vertical integration.
Rebundling the value chain
Initially, digitisation led to unbundling, allowing activities to be undertaken outside company boundaries, but for consumers engaging with multiple providers, this became very expensive. Platforms aggregate or rebundle providers, creating a consistent consumer experience.
In the late 90s, media companies specialised in creating great content and owning the distribution channel. The internet unbundled distribution, taking news away from print, and rebundled it as a news feed, allowing anyone to share for free.
New technology like Wiki and publishing tools from companies such as Adobe allowed new forms of content production, and this explosion of content and distribution mechanisms prompted Facebook and Google(news feed and search engine owners), to rebundle content in a scalable way.
Here, the value moves away from commoditised media companies, to specialists managing rebundling around customers, engagement and data.
Similarly, music was unbundled from the album and rebundled as a Spotify playlist, moving the value and power to companies rebundling the playlist. In financial services, where traditional banks built their products and services around a distribution system of branches and agents, the rise of Open Banking and APIs enables financial products to be easily-embedded into ecosystems- unbundling the supply from the bank and distributing it anywhere.
With PSD2 regulations allowing third-parties to access banks’ data, financial services will be rebundled around whoever understands customers best, is better at credit management and able to provide the right financial services at the right time.
Companies such as Square and Shopify are entering the financial services sector and they’re in a good position to rebundle because they don’t rely on financial services to make money; they do this with their software. They also have better data and can offer subsidised financial services that in turn increases adoption of their systems, resulting in more data creation.
The power of ecosystems
Industrial boundaries are dissolving and we’re moving to a place where we can rebundle the unbundled components from the traditional value chains to create an entirely new proposition for end customers.
That is the power of APIs; their management tools and enhanced levels of connectivity support the process of rebundling. And platforms, with their central single view of customer activity, can easily rebundle multiple propositions for the end user. Together, APIs and platforms are a powerful combination.
About the Author
Sangeet Paul Choudary Founder of consultancy, Platformation Labs, Singapore-based Choudary supports C-level execs in more than 50 Fortune 500 firms across North America, Europe and Asia, and is a board member and adviser to Global 2000 firms and ministerial committees. Choudary is considered a ‘must read’ by Harvard Business Review, recognised as a ‘young global thinker’ by the World Economic Forum and has ranked ‘top management thinker’ for two successive years by Thinkers 50 (global ranking org).
Sensedia is a leading integration solutions provider with 150+ enterprise clients across a range of sectors. Its world-class portfolio includes an API Management Platform, Adaptive Governance, Events Hub, Service Mesh, Cloud Connectors and Strategic Professional Services’ teams.
Sensedia is winner of Wealth & Finance International’s ‘Best Open Banking Solutions Provider 2021.www.sensedia.com