Digital organizations have become highly dependent on digital platforms and customer needs as key resources for digital service innovation. These resources in the competitive environment are making and shaping innovation of digital services because, though external, they remain central to digital organizations’ strategic innovation and competitiveness. Yet, how and why organizing these resources influences digital service innovation is under-explained in the literature. This paper, based on an empirical study and grounded theory methodology, addresses this limitation. It explains that digital service innovation occurs through two complementary types of organizing, namely: foundational knowledge organizing by combining digital platforms and customer needs, leading to compound and technical knowledge; and applied knowledge organizing by creating applications, surpassing customer needs, improvising new solutions, and relating with customers, leading to original, transcendent, rapid, and renewed knowledge. The theoretical contributions of this explanation are discussed along with its practical and future research implications.