Thirty years ago, the number of software companies in the world was small—think Microsoft, SAP, and Oracle—and they wrote every piece of software that comprised their products. There was no supply chain for building software. However, as companies began to evolve, multiply, and compete, the industry evolved along with it. And every mature industry has a supply chain.
Consider the industries that produce physical goods. Being from Detroit, my mind jumps to the auto industry. Automobile manufacturers don’t build every piece of a car themselves. They buy steel from a steel company, seats from a seat company, speedometers from a speedometer company. All those Camrys and F-150 pickup trucks zipping past you on the highway contain parts provided by dozens, maybe hundreds, of major suppliers. Those suppliers in turn draw from hundreds or even thousands of smaller parts makers along the global supply chain. As industries mature, so do their supply chains. As more and more companies specialize in specific parts of the process, the industry as a whole can become more efficient and productive.
Over the last 10 years, as the software industry has matured, it has developed its own supply chain. Every company is now a software company to some degree, and most companies can’t build everything from scratch. Just like Ford and Toyota, they need a supply chain that segments the industry into areas of expertise and allows each participant to specialize in a core competency.
But the software supply chain looks different from the auto industry’s. Instead of specializing in speedometers or steering wheels, software supply chain companies deliver reusable chunks of code that developers piece together to make finished applications. These are APIs. Amazon Web Services delivers the data center. Twilio provides communications. Stripe and PayPal enable payments. Modern apps integrate dozens of these components into a unique value proposition for the customer.
APIs are the new supply chain, enabling every company to become a software company without reinventing the wheel. Welcome to the API economy.
How did we get here?
The true pioneer of the API economy is Amazon. In the mid-2000s, Amazon decided to rent compute power and storage capacity not as applications but as building blocks developers and other companies could use to build their apps. The service would be flexible, able to scale up and down on the fly. You paid only for what you used, receiving a monthly bill just like for your mobile phone and your electricity. This is what became Amazon Web Services.
The pay-as-you-go model was a huge breakthrough, maybe as significant as the technology itself. AWS drove down the cost of launching a new tech company to almost nothing. Before AWS, you needed to buy expensive servers, storage systems, routers, and database software. You might spend a million dollars buying and installing hardware just to stand up v1 of your idea. With AWS and its pay-as-you-go model, an entrepreneur could spend maybe a hundred bucks and launch in a few minutes—the time it took to fill out a form and enter a credit card number.
The result of low startup costs was more startups—ones that could get to market faster. They could go from an idea sketched on the back of a napkin (or, in Twilio’s case, the back of a pizza box) to shipping product in a matter of months. They could expand and grow without any friction from infrastructure. They could move fast and build things.
Life in the API economy
If you look at the companies that make up the API economy, they’ve each adopted this model. They took problems that were a real pain to solve, spent a few years coding up solutions, and now provide that service to others. For many, Twilio included, the service itself is a black box. Customers don’t know or care how it works. They just plug our code into theirs, and off they go.
The API economy has unleashed a new generation of startups that are faster and leaner than traditional companies. These nimble upstarts disrupt companies across every industry, forcing bigger, legacy companies to start building new software in order to keep up, further accelerating the pace of innovation.
APIs are the new building blocks for developers. Before the maturation of the software supply chain, the lift to build was so great that it was often easier just to buy a solution. You had to be as good at software as Microsoft or Oracle in order to build software. APIs have made it much faster and cheaper to develop applications. They can scale up to support billions of users. And, most importantly, they’ve lowered the barrier to entry for builders, unlocking experimentation at every company across every industry. This would have been unimaginable 10 years ago.
I believe this shift to component software is the next big leap in the industry’s evolution. This is the next great era of software—the one that comes after SaaS.