We propose a theory of innovation in services based upon the development of new markets that exploit the powers of ICT to coordinate service production and delivery. As digital communications and computational infrastructure have developed over the past few decades, the scale and scope of the service sector has also evolved such that it is now, we believe, in the midst of a productivity revolution driven by the ICT enabled decomposition of services to their elemental parts and the subsequent gains through specialization and reintegration of these elements. This works to advance existing services and create new services, and so to drive the growth of economic activity. In this paper, we propose a theory of this evolutionary process.