The Paradox of Openness: Exposure vs. Efficiency of APIs

53 Pages Posted: 16 Aug 2019

See all articles by Seth Benzell

Seth Benzell

MIT Initiative on the Digital Economy

Jonathan Samuel Hersh

Chapman University - The George L. Argyros School of Business & Economics

Marshall W. Van Alstyne

Boston University – Questrom School of Business; Massachusetts Institute of Technology (MIT) - Sloan School

Guillermo Lagarda

Global Development Policy Center Boston University

Date Written: August 5, 2019

Abstract

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.

Keywords: Platforms, APIs, Information Security, Technology Strategy, Market Capitalization

JEL Classification: O3, O32, L32, M15

Suggested Citation

Benzell, Seth and Hersh, Jonathan Samuel and Van Alstyne, Marshall W. and Lagarda, Guillermo, The Paradox of Openness: Exposure vs. Efficiency of APIs (August 5, 2019). Available at SSRN: https://ssrn.com/abstract=3432591 or http://dx.doi.org/10.2139/ssrn.3432591

Seth Benzell (Contact Author)

MIT Initiative on the Digital Economy ( email )

245 First Street
Cambridge, MA 02142
United States

Jonathan Samuel Hersh

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

HOME PAGE: http://jonathan-hersh.com

Marshall W. Van Alstyne

Boston University – Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-3571 (Phone)

HOME PAGE: http://questromapps.bu.edu/mgmt_new/Profiles/VanAlstyneMarshall.html

Massachusetts Institute of Technology (MIT) - Sloan School ( email )

Initiative on the Digital Economy
245 First St, Room E94-1521
Cambridge, MA 02142
United States
617-253-0768 (Phone)

HOME PAGE: http://web.mit.edu/marshall/www/home.html

Guillermo Lagarda

Global Development Policy Center Boston University ( email )

53 Bay State Road
Boston, MA 02215
United States

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