Marshall Van Alstyne
Seth G. Benzell
APIs are the building blocks of digital platforms, yet there is little quantitative evidence on their use. Do API adopting firms do better? Do such firms change their operating procedures? Using proprietary data from a major API tools provider, we explore the impact of API use on firm value and operations. We find evidence that API use increases market capitalization and lowers R&D expenditures. We then document an important downside. API adoption increases the risk of data breaches, a risk that rises when APIs are more open or place less emphasis on security. Firms reduce API data flows in the month before a hack announcement, consistent with a conscious attempt to limit breach scope. In the same period, however, the variance of API data flows increases, consistent with heterogeneity in firms’ ability to detect and shut down unauthorized data access. Our findings highlight a fundamental paradox of openness: It increases upside value and downside risk at the same time. We document that firms respond to these trade-offs in logical ways and conclude that the benefits of opening APIs exceed the risks for firms situated to adopt a platform strategy.