The idea is that either the integrated system or the subsystems need to be modular and comfortable in order to optimize performance for the other. He uses Microsoft OS and Linux as examples. Applications in Microsoft are suboptimized in order for the OS to be optimized (this is a result of closed source) whereas in Linux, the OS is suboptimized via an open and modular architecture in order to optimize the application (i.e. being able to change code in the OS to optimize application performance).
In Clayton’s world, “modular” implies “suboptimal” or “inefficient.” You can’t make money on the modular layers in the value-added chain (they’re the integators). You make money at the borders to the modular layers. Another way of looking at this is that no one is going to make money on SOAP, you’re going to make money on the parts that talk SOAP, the services.