Google buys Songza; Spotify nabs The Echo Nest; Facebook purchases Moves; Path gets TalkTo; and Edelman takes over Deportivo. What do these acquisitions have in common? APIs! In each of these buyouts, APIs played a central part in influencing the acquisition decision. They were also an essential factor in the calculation of the purchase price.

API strategy execution is becoming a key component of business valuation. We analyzed these 2014 acquisitions, and spoke with business analysts Michael Skok and Sangeet Paul Choudary to help us better understand the role that APIs are playing in the business acquisition process. Skok suggests that there are three main ways that APIs create value:

1. As an indicator of a future-proof software architecture
2. As a technical asset necessary to build out an ecosystem
3. As proof of a robustness and quality product offering

To better see how these value generating aspects of APIs are influencing tech buyouts, let’s delve into these a bit as a backdrop of our analysis.

APIs at the Centre of the Digital Transformation Era

Serial entrepreneur, business analyst and VC partner at North Bridge, Michael Skok, believes the increasing role that APIs are playing in calculating business value is another sign of the emerging transformative power of cloud computing. Companies are now trending toward the use of cloud computing as a change agent. They are no longer leveraging it solely to transition non-core operations to cloud-based SaaS providers in an effort to cut costs. Instead, Skok and his research colleagues are seeing that businesses are transitioning their products and services to the cloud to create previously unimaginable offerings. Bringing customers, location data, various services, and payments together in one, often mobile, experience is transformative. This is causing disruption across whole businesses and industries.

In Skok’s research analysis, he has found that a company’s utilisation of APIs is used in three ways when their value is assessed. He explained to us that:

“If a business has an API layer, it is a sign they have been more thoughtful about their organisational architecture.” Skok believes the organisational knowledge that comes with using APIs is an indication that the business should be valued as forward-thinking and as having the right mindset to seize new opportunities in a transformative environment.

“APIs are looked at as a sign that businesses have the infrastructure to be able to build an ecosystem around their customers and products.” Skok believes that launching an API platform gives a business the capacity to build out an ecosystem. This is a strong consideration when calculating a business’ potential future value. Those that have actually demonstrated successful use of an API in building out an ecosystem are leading the market. As a result, they are seeing this factored into their valuation.

“APIs are valued as a sign that not only is a business building on its own architecture, but it is making itself an internal customer of its own products. They are eating their own cooking.” Skok believes that this is a sign of the robustness and quality of the API and product development culture within a business. It also points towards the potential for greater internal efficiencies and more rapid time-to-market.

Now, with this idea that APIs are generating great value, let’s look at the role they played in these recent industry acquisitions.

1. APIs as an indicator of a future-proof software architecture

This summer, Global PR giant, Edelman, made its largest non-PR investment ever when it acquired Swedish creative agency and former Nordic APIs presenter, Deportivo.

Alexandra Bruell from AdAge confirmed that the purchase was based on Deportivo’s ability to “build apps and design online experiences.” In other words, the aquisition stemmed from Deportivo’s ability integrate APIs into their creative campaigns.

Edelman’s Global Chief Operating Officer Matthew Harrington told us:

Deportivo was born in a time and place where APIs are as natural a medium for them as is the written word or photography. Acquiring Deportivo gave us direct access to their vast experience in a world where open data makes using and creating APIs more critical than ever to communications.

In the case of the acquisition of TalkTo by social network Path, it was their API architecture that first brought them to the attention of their eventual buyer. According to Dennis Keohane of BetaBoston, TalkTo came onto Path’s radar almost immediately after it launched its public API. In other words, part of TalkTo’s value came when Path saw that the messaging service had future-proofed its architecture by making its messaging capabilities available as an API. After seeing the potential of TalkTo’s API, they paid an undisclosed amount this June to gain exclusive ownership of it. With it, Path will offer messaging services as part of its social media network.

These examples demonstrate what Skok explained: APIs generate value for a company by indicating to a potential acquiror that their investment is future proof.

2. APIs as a technical asset necessary to build out an ecosystem

Music industry journal Billboard believe that APIs were at the heart of the acquisition plan that saw Swedish music streaming service Spotify pay $100 million for The Echo Nest in March of this year. The Echo Nest has built a solid product of internal algorithms and data analytics tools to make contextual and personalised music recommendations for its users. They turn their music and preference data into knowledge which they expose via an API.

Billboard journalist Alex Pham wrote:

Many apps already incorporate Spotify to play music and The Echo Nest to make recommendations to their users, via the companies’ APIs. Spotify does this to expand its distribution footprint and acquire more listeners. The Echo Nest has used APIs to attract potential new customers, as well as draw data from apps that use its APIs.

The acquisition is expected to help Spotify as it continues to grow its API platform. Business analyst and founder of Platform Thinking, Sangeet Paul Choudary told Nordic APIs that he sees APIs at the heart of a “distribution-centric” platform model. In a distribution-centric API platform, value is first generated by turning things into data assets. Spotify has done this by turning music into data, for example. A second, deeper value is then created when the API provider can collate and understand data on user transactions related to those digital objects. In this case, the secondary platform value is generated through creating data about how Spotify users interact with the Spotify music database and how they set music preferences. This higher value is what Spotify can now generate using The Echo Nest API. “Capturing the identity of users and then graphing that identity with knowledge of the off-line world (such as weather, location, time of day) will become very important to building successful API platforms,” says Choudary. “It is not just startups but large organizations that need to think this through. This will be the social competitive advantage.”

The Echo Nest’s Chief Executive, Jim Luchese, confirmed the ecosystem potential when speaking to Billboard. “The idea of combining musical understanding through The Echo Nest with the music itself from Spotify will offer a ton of additional value for developers,” Luchese said. In fact, developers are already incorporating The Echo Nest API into their own products. This means the purchase by Spotify will allow the music provider to immediately expand their ecosystem and enter new customer markets, as The Echo Nest’s API is, according to TechCrunch, already used in partnership with Rdio, iHeartRadio, Deezer and Rhapsody.

Facebook’s purchase of Finnish location and quantified-self tracking app, Moves, is another example of buying a ready-made service rather than building your own. This acquisition in April points to the nuanced value that APIs are being given when calculating overall worth of a company. The Moves app uses APIs to connect with the sensors built-in to iPhones to track a user’s fitness and exercise activities. It shows the results in a stunning user interface which helped the app become a “surprise hit” in Apple’s App Store.

While the app prioritised the end user experience with its design and ease of use, CEO and Founder Sampo Karjalainen wrote in his blog that one of the hard lessons learnt was that their own API had limited impact. The founder wrote that “Moves has over 50 Connected Apps: mobile and web services developed by third parties, using data from Moves… This is great, but it seems that the impact on the acquisition…hasn’t been very significant.” Karjalainen sees the launch of the open API as a diversion from the small teams’ focus that it should have been paying to its core value proposition.

After the purchase, Facebook told the Wall Street Journal that the Moves acquisition was “nowhere near” the size of other recent acquisitions by the social media giant that included WhatsApp and Oculus VR. Like The Echo Nest, Moves’ public API had the potential to uplift the value of the startup if it would have had more of an ecosystem effect on the product. Even though it certainly had the beginnings of one with over 50 connections, its size was relatively small compared to its acquiror’s. Because of this, the API stood on its own in the valuation. Without an ecosystem behind it, the primary value of Moves seems to have been as a reliable product that Facebook could purchase rather than build. This points to Moves’ value being determined as an app rather than as a platform.

The Moves case study is at odds with the experience of TalkTo. Facebook bought Moves to integrate its product; they didn’t really care about the ecosystem potential of the app, as they have other platform growth strategies to focus on. For TalkTo, the ecosystem potential did factor in to its purchase value, even if the ecosystem goal had not yet been realized. Social network Path knew that messaging had been a key reason for its growth; they had seen their business expand from 1.5 million users to 4 million by adding messaging features to their platform. While TalkTo may not have had much of an ecosystem of its own, its ability to be used as an ecosystem platform component leads to the conclusion that it was factored into its pre-acquisition valuation. Juxtaposing the Moves and TalkTo examples indicates that ecosystem potential is more valuable depending on the size of the acquiror’s existing user base.

3. APIs as proof of a robustness and quality product offering

Also this summer, Google bought music-streaming service Songza for an estimated $39 million. Songza is a music streaming service. Like The Echo Nest, one of their key characteristics is that they are able to combine curated music selections with contextual signals like the weather, time of day, and user location to make personal music recommendations. Songza channels the results through its API. Skok points to some of the thinking that may have lead Google to make the purchase:

As an acquiror, one of your most important questions is how to integrate your acquiree. If they have beautiful APIs, it makes that integration very easy, and therefore makes the acquisition more appealing. Most acquisitions are a ‘build versus buy’ acquisition. The buyer can probably afford to build it, but it’s about time-to-market. If the acquirer’s product is already built, then that is very attractive. Build versus buy is often not a cost decision but a time-to-market decision.

Integrating Songza and getting to market fast would have almost certainly played into Google’s decision. With Apple’s recent purchase of Beats and the steady growth of Spotify and Pandora, Google needed to keep up with the market if it was going to building a music-streaming customer base. Stuart Dredge from The Guardian believes the way data is accessed via the Songza API is what Google bought from them, noting in his article Google’s desire to quickly integrate the Songza product into its music streaming and video services. This fast time to market is possible because Google will be able to use Songza’s robust API.

The user base of Songza (at 5.5 million) is much lower than Spotify’s estimated 10 million and Pandora’s approximately 75 million, so Google was not trying to obtain a large userbase or leverage the Songza ecosystem directly. Instead, the acquisition points more towards the idea of being able to quickly integrate the product into Google’s existing services (e.g., Google Play, Google Play Music All Access streaming service, and YouTube). Stok believes this acquisition by the search giant is about “using APIs to build the next generation of services, a new class of applications to dramatically transform the industry.”

The quality and robustness of the TalkTo API seems to have certainly factored into its valuation by Path. This becomes clear when you look at what Path did with TalkTo as soon as it made the purchase. Path used the TalkTo API to immediately create a separate but complementary product: the PathTalk application.

APIs add value at different rates

The above summaries have been simplified somewhat to try and clarify the way that APIs add to a business’ worth. In reality, the fact that a business has an API may always have some influence on its value, at least in demonstrating that the business has future-proofed its architecture. Analyzing these acquisitions with closer detail, we can better define the value APIs create. The following table summarizes:

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How is your API strategy adding to your business value?

Taking Skok’s three ways that APIs can add value to a business, it appears that any business can begin to increase its worth by developing an API strategy. By taking just two steps, a business can demonstrate that it understands the global environment of “digital transformation” that is affecting every business. By taking these steps to become an API platform, a business shows that it has a potential for longer-term sustainability and applies a modern understanding to its decision making and planing. To further demonstrate this potential, it is important that the API is used internally. How an API strategy helps a business to develop quickly, improve internal efficiencies, and better collaborate with partners shows that the business is flexible enough to quickly enter new markets and maintain competitive leadership by creating new products that meet customer needs. Finally, and the most challenging, is the ability to foster an ecosystem around a business’ API. The formation of an ecosystem is largely outside of a company’s control, and may take time before it flourishes sufficiently. If the potential for it to happen is large enough (in the eye of the acquiror) or if it has already formed, it will certainly be factored into a business’ overall value.

APIs are undoubtedly being considered in the valuation of businesses. Having a robust, scalable API that is being used throughout a value chain will show external parties and investors that your business is a worthwile and sustainable investment. Knowing how your API strategy is creating business value can be used to encourage new investment or orient the business for the highest potential acquisition price. How is your API strategy adding value to your business? Share you thoughts in a comment here, on Twitter, or on Facebook.

[Editor’s notes: Nordic APIs is an independent publication and has not been authorized, sponsored, or otherwise approved by Citrix Systems, Inc.]