apidays New York 2022 - Beyond API Regulations for Finance, Insurance, and Healthcare July 27 & 28, 2022 How have publicly traded firms benefited from APIs? Jonathan Hersh, Economist and Researcher at Chapman University ------------ Check out our conferences at https://www.apidays.global/ Do you want to sponsor or talk at one of our conferences? https://apidays.typeform.com/to/ILJeAaV8 Learn more on APIscene, the global media made by the community for the community: https://www.apiscene.io Explore the API ecosystem with the API Landscape: https://apilandscape.apiscene.io/ Deep dive into the API industry with our reports: https://www.apidays.global/industry-reports/ Subscribe to our global newsletter: https://apidays.typeform.com/to/i1MPEW

1. How APIs Create Growth for Firms
Jonathan Hersh
Argyros School of Business
Chapman University
WorkHelix – We’re hiring!
@DogmaticPrior
Marshall Van Alstyne
Boston University
Questrom School of Business
MIT Initiative on the Digital Economy
@InfoEcon
A Primer on Convincing Your CEO to
Adopt APIs for Fun and Profit
Seth Benzell
Argyros School of Business
Chapman University
Stanford HAI Digital Economy Lab
@SBenzell
“How APIs Create Growth by Inverting the Firm”
R&R Management Science
https://tinyurl.com/economyAPI

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3. How does an economist
think about APIs?
• Improve internal communication +
programming efficiency
• Traditional ‘pipeline’ firm productivity
• Recruit outsiders to create
complementary products
• The “Inverted Firm” (Parker et al.,
2016)
• The third parties that develop
complementary products using the
apps also benefit

4. In the process we will answer these questions
• How do we know APIs add value?
• Causal identification problem: would the firm have grown
without them?
• If they work, how do they add value to a firm?
• Improve communica�on and ⬆ programmer efficiency? OR do
they invert the firm?
• What risks do APIs pose for firms?
• ⬆ Hack risk? If so how? How do firms respond?

5. Outline
1. Introduction
2. Mapping the Digital Economy with APIs
3. Measuring How Much Firms Benefit from APIs
4. How do APIs add value? Invert the firm or make programmers more
efficient?
5. Estimated Hack Risks of APIs
6. Conclusion

6. Data Sources
• Public API data: ProgrammableWeb –
Wikipedia for APIs
• Crowdsourced data on all APIs in use
• Data on firms: Compustat.
• 80k publicly traded firms
• Private API data
• Data on only internal API firm use
• Privacy Rights Clearinghouse
• Disclosed data breaches

7. ProgrammableWeb API Network
• Programmable web tracks ~25k APIs
• Lists date of API opening, developers for each
API, technical specs and “followers” or fans of an
API
• We can match these APIs back to firms and see
the evolution of which firms have APIs
• Each dot is a firm, each connection is an app that
connects two APIs
• “Map of the digital economy”

8. API Network in 2005
• Dot: Firm’s API
• Connection: App
connecting APIs

9. API Network in 2006
• Dot: Firm’s API
• Connection: App
connecting APIs

10. API Network in 2007
• Dot: Firm’s API
• Connection: App
connecting APIs

11. API Network in 2008
• Dot: Firm’s API
• Connection: App
connecting APIs

12. API Network in 2009
• Dot: Firm’s API
• Connection: App
connecting APIs

13. API Network in 2010
• Dot: Firm’s API
• Connection: App
connecting APIs

14. API Network in 2011
• Dot: Firm’s API
• Connection: App
connecting APIs

15. API Network in 2012
• Dot: Firm’s API
• Connection: App
connecting APIs

16. API Network in 2013
• Dot: Firm’s API
• Connection: App
connecting APIs

17. API Network in 2017
• Dot: Firm’s API
• Connection: App
connecting APIs

18. API Network By Industry
• Dot: Firm’s API
• Connection: App
connecting APIs

19. • Dot: Firm’s API
• Connection: App
connecting APIs

20. API Network in 2015
• Dot: Firm’s API
• Connection: App
connecting APIs

21. Average API Use by Industry, Publicly Traded Companies Q3 2020
• Growing but low public API
use across publicly traded
firms.

22. Average API Use by Industry, Publicly Traded Companies Q3 2020
• Many industries have < 2%
public API use

23. Measuring Impact of Opening APIs on Firm Stock Price
• Merge APIs (from ProgrammableWeb) with
COMPUSTAT record of all publicly traded firms.
• Estimate two-way fixed effect models:
𝑙𝑙𝑙𝑙𝑙𝑙 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑒𝑒 𝑖𝑖,𝑡𝑡 = �
𝑘𝑘
𝛽𝛽𝑘𝑘𝐴𝐴𝐴𝐴𝐼𝐼 𝑖𝑖,,𝑘𝑘,𝑡𝑡 + 𝛼𝛼𝑖𝑖 + 𝛾𝛾𝑡𝑡 + 𝜖𝜖 𝑖𝑖,𝑡𝑡
𝛼𝛼𝑖𝑖 = control for firm characteristics
𝛾𝛾𝑖𝑖 control for time shocks
𝛽𝛽𝑘𝑘 impact of API opening k periods
before/after API opening

24. • Firms that open APIs
have a 38.7% larger
stock value, compared
to firms that do not
• This is true even for
smaller firms or non
computer services firms
Impact of API Opening On Firm Stock Price

25. Synthetic Control
• Okay, but firms that open APIs are
different from those that don’t.
• (They have super smart that attend
this conference.)
• Synthetic Control analysis builds
statistical counterfactuals for each
API firm, comparing it to a set of
hypothetical non-API firms
• Still impact of APIs is large and
positive.
• Cumulative average difference in
stock price is $8.4B after 20
quarters

26. Does having a more popular API matter?
• Yes!
• Firms with more API
connections grew
faster than those
with fewer
• Supported by causal
instrumental variable
analysis –
instrument for API
centrality using
deprecated APIs

27. How do APIs Increase Firm Value
• Okay, you win, firms that use APIs have higher
stock prices
• How do they do that?
Two hypotheses
1. Improve internal communication + programming efficiency
– Traditional ‘pipeline’ firm productivity
2. Recruit outsiders to create complementary products
– The “Inverted Firm” (Parker et al., 2016)
– The third parties that develop complementary products using the
apps also benefit

28. No impact on market value from internal only APIs

29. Outside-firm engagement drives all market value increases
• More outside partners
– more value
generated
• APIs make it easy for
smart people outside
your firm to add value
• Takeaway: Make it
seamless for them to
do so!

30. API Firms grow in excess of capital/asset deployed
• If we control for
amount of assets a
firm deploys, APIs
still have a large
impact.
• APIs don’t just help
a firm scale
• Takeaway: APIs
are a great use of
capital for firms!

31. Downsides to API Adoption? Data Breaches?

32. Increased hack risk 2 years post API opening
• Firms 6-7 times
more likely to be
hacked in the
two years after
opening an API!
• Path of attack
via “malicious
insider”

33. Remember the Target hack?

35. In the months after a hack, firms increase testing and login
authorization APIs

36. Conclusions
• Public firms adopting public APIs grew much faster than similar
counterparts from 2007-2020
• Correlational and IV evidence shows that public firms with more
central APIs in the API network grew faster than those with less
central APIs
• Much less evidence of an internal productivity effect, suggesting
most benefits are due to ‘firm inversion’
• Some evidence of increased vulnerability to hacks

37. People
• Jonathan Hersh, Argyros School of Business and Economics, Chapman
University – hersh@chapman.edu
• Marshall Van Alstyne, Boston University Questrom School of Business
– mva@bu.edu
• Seth Benzell, Argyros School of Business and Economics, Chapman
University – benzell@chapman.edu
• https://tinyurl.com/economyAPI
Comments, Questions or Suggestions

38. Instructor
Jonathan Hersh, PhD - hersh@chapman.edu
Teaching Assistants:
Joshua Anderson
Cady Stringer
Sam Webster
37
• Assistant Professor, Chapman University
Argyros School of Business
• Education: PhD in economics, Boston
University, M.Sc. Wharton, BA U Chicago
• Work experience: Principal Machine Learning
Scientist at Workhelix, Data Scientist for the
World Bank, economic consultant, and
developer
• Research: Economics of information systems,
computer vision and applied machine
learning

39. 38
Research Overview
• Satellite Imagery + Computer
Vision + Machine Learning
Count cars in
parking lots!
Damaged
buildings in
Syria!
https://www.pnas.org/content/118/23/e2025400118

40. 39
Most Proud of: Cited on the Wikipedia Page for
“Waffle”