Eighteen years ago, five airline companies—Lufthansa, Air Canada, United Airlines, Thai Airways and Scandinavian Airlines—formed an alliance with a vision to offer better services to their customers. Under the banner of Star Alliance, these companies started sharing resources such as sales offices, maintenance facilities, operational staff, and seating capacity. As a consequence they could offer customers a broader set of destinations, options for collecting and using mileage points across partner airlines, and lower prices because of cost consolidation. Customers saw immediate value in this seamless enhancement in the scope of services. Even when dealing with any one airline, they could enjoy access to the resources of several airlines. Hailed as one of the most successful alliances in business history, Star Alliance, whose number of partners ultimately grew to 27, soon inspired the formation of rival airline alliances such as One World and Sky Team.
The onset of digitization, however, has exponentially amplified the potential of this success story. In the digital world, customers may still deal with any one airline, but their access now expands to the resources of much more than just a handful of allies. Indeed, through any one airline, customers can have access to thousands of organizations across a spectrum of businesses such as hotels, rental cars, vacation resorts, cruises, and restaurants. In addition, they can use and share mileage points across these numerous organizations. The invisible force behind this transformation is the application program interface (API), a technology that allows firms to interact and share informational assets with other firms. As digitization opens new opportunities for firms to leverage informational, rather than physical, assets, APIs are poised to replace alliances as the most common means for inter-firm partnerships.
How are APIs different from alliances? We see three important dimensions.
Scalability of operations. Limiting the size of alliances is understandable. They entail negotiating complex terms of engagement along with how revenues, physical assets, and data will be shared. The management of shared assets and activities (mostly through human interactions) can be complex. And the sharing of physical assets sharing and integration of data usually demand substantial investments that are typically specific to each relationship. Not surprisingly, as the number of alliance partners increases, the cost and complexity of data integration escalates non-linearly.
With APIs, however, the terms of engagement and revenue sharing can be highly automated. Also, informational assets replace physical assets as the key resources shared. As a consequence, data-integration investments need not be relationship specific. For example, Expedia’s publicly described APIs (Expedia Affiliate Network) make it possible to integrate data across numerous partners, which include almost all competing airline companies and thousands of hotels, resorts, rental car companies, and payment-service providers. There need not be any limit on the number of partners signing up. In fact, the more partners that sign up, the more Expedia benefits, with marginal, if any, increase in costs and complexity.
Flexibility in acquiring partners. Companies frequently forge alliances to share risks in new ventures or to leverage complementary resources. General Mills, for example, formed an alliance with Nestlé (Cereal Partners Worldwide) to enter Europe with breakfast foods not only to mitigate the risks of entering a market dominated by Kellogg but also to utilize Nestlé’s distribution network in that part of the world. Implementation costs associated with such objectives and the fact that not all companies are suited to share risks or offer complementary resources restrict firms to working with a narrow set of partners.
APIs, on the other hand, turn the burden of finding partners willing to share risks and offer complementary resources on its head. With APIs, companies pivot from finding partners to letting partners find them. Known as the URL strategy, Eric Schmidt of Google called it “ubiquity first, revenue later.” Kraft Foods and Nestlé, for example, opened API platforms that can attract a variety of potential partners, ranging from those who suggest recipes and cuisine preferences to advocates of health consciousness who may highlight food allergies or calorie counts. Not all these partnerships may bear fruit, but a few may become blockbusters. The idea is to attract all kinds of partners first and worry about the risks of revenue generation or the usefulness of their synergies later. This API-based approach thus allows companies to be substantially more flexible in finding effective business partners.
Fluidity in business goals. Companies usually have specific aims and finite objectives when they venture into an alliance. The costs associated with alliances and the risks of failures do not allow for any ambiguity in the goals. When Starbucks formed an alliance in 1993 with Barnes & Noble, for example, it was with an express goal of creating in-house coffee shops within the stores of the book-retailing giant. And indeed such unequivocal clarity in purpose was likely necessary for this alliance to succeed.
API-based partnerships, however, allow firms greater fluidity in business goals and substantially more experimentation in realizing them. Take the case of Twilio, a company that provides text-, voice-, and picture-messaging capability that can be embedded into any application. This service could potentially be used in many industries. Instead of forming alliances with companies and launching into any particular industry, Twilio opened its APIs and allowed third-party developers to use them. It is now used as the communication engine for Uber, Airbnb, Home Depot, Walmart, and others. Instead of investing heavily in any particular partner specific resources, Twilio focuses on the communities that drive adoption of its APIs.
These dimensions of APIs take business partnerships to an entirely new level. Indeed, just as Big Data transformed business analytics through volume, variety, and velocity, APIs are revolutionizing traditional business alliances and partnerships through scalability, flexibility, and fluidity. APIs may well be heralding the Age of Big Alliances.