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CEO Steve Ballmer steers Microsoft toward 'devices and services'

Although the Windows operating system continues to be its bread-and-butter business, it's no longer how Microsoft wants to define itself, Ballmer says.

July 11, 2013|By Chris O'Brien
  • Microsoft CEO Steve Ballmer gives Justin Gudeman, 14, a gift bag containing a new Xbox game console during the grand opening of a company store in Troy, Mich.
Microsoft CEO Steve Ballmer gives Justin Gudeman, 14, a gift bag containing… (Bryan Mitchell, Bloomberg )

SAN FRANCISCO — Considering that Steve Ballmer has been chief executive of Microsoft Corp. for more than a decade, it might sound strange to say this, but the company may finally be his.

Whether that's for better or for worse remains to be seen.

But in announcing a sweeping reorganization Thursday, Ballmer sought to distance Microsoft from its historic identity as the company that Bill Gates created. He emphasized that although the Windows operating system continues to be its bread-and-butter business, it's no longer how the Redmond, Wash., company wants to define itself.

Going forward, Microsoft is now about "devices and services," Ballmer said in a memo.

"Ballmer has definitely placed his stamp on Microsoft, meaning the 'Gates era' has come to an end," said Patrick Moorhead of Moor Insights & Strategy. "He is fundamentally shifting the company from an operating system company to services and devices company. In a world where operating systems are free, as in the case of Android, iOS and Linux, Windows is a lot less important."

The change is being driven by a fundamental shift in the way that businesses and consumers use technology.

Across the tech industry, many companies have been caught flat-footed by the speed at which tablets and smartphones are eating into the traditional PC business. This week Gartner Inc. reported that sales of PCs in the quarter that ended in June fell 11% from a year earlier, a drop that follows a historic decline in the previous quarter.

These days, consumers and businesses have a variety of gadgets that store their content and services in the so-called cloud — computer servers connected by the Internet. The focus among competitors such as Apple Inc. and Google Inc. has been to make it easier for all these devices to work together so users can get access to all their stuff any time, anywhere.

Microsoft, which still dominates the desktop computer market, is coming late to that party, said Colin Gillis, an analyst at BGC Partners. Although the company has been talking about offering a similar, seamless experience, it still has a lot of work to make that a reality.

"You've got to get out there and have one consistent message that says we run across whatever device you want," Gillis said.

To accelerate that shift, Microsoft is collapsing the number of its divisions from eight to four. Ballmer wants to promote more collaboration at a company often seen as internally fractious. And he wants it to move faster, continually updating and improving products, rather than unveiling big updates every few years.

"We need to make the right decisions and make them more quickly," Ballmer said during a conference call. "We have a clear strategic direction now. We are one Microsoft."

The four new units are Operating Systems, which includes mobile and desktop versions of Windows; Applications and Services, which includes the Bing search engine, Skype video chat and other online products; Cloud and Enterprise, which includes server software and business products; and Devices and Studios, which includes the Xbox game console and the Surface tablet, along with entertainment content.

It's a radical step to refocus the company. But it's also the capstone to a year of wholesale transformation that underscores the urgency with which Ballmer views Microsoft's current situation. Since October, Microsoft has engaged in a historic upheaval of nearly every part of its massive product line.

The biggest news was the redesign that came with Windows 8 to emphasize mobile devices and touch screens. But there's also the launch of, the new Windows Phones, the Xbox One game console coming this year, a new cloud-based version of Office. And the list goes on.

And there's been Microsoft's push to build its own tablet, the Surface. In the announcement, Ballmer promised to continue working with third parties as it has traditionally done, but also to keep looking for ways to build more of its own devices.

Many of these moves have come under heavy criticism. Sales of the Surface have not been stellar. Windows 8 has failed to stem a steep decline in PC sales.

But from the point of view of the new Microsoft, all this matters less than what analysts think. With the new guiding philosophy, Windows is not the sole benchmark by which to measure the company's success or failures. Rather, Microsoft wants to be given credit for the enormous breadth of things it does for both consumers and enterprise, and how well all of those things work together.

"This is really about setting us up for long-term profit growth," Amy Hood, Microsoft's chief financial officer, said during the conference call.

Although some of the consumer offerings have failed to catch fire so far, the enterprise side of Microsoft has been growing steadily in recent months.

At least for the moment, investors seem to be optimistic that this new, post-Windows Microsoft has a fighting chance.

Its shares closed Thursday up 99 cents, or 2.8%, to $35.69. The stock has been on a decent run this year, up nearly 34% and coming close to the mark of $36 a share that it last reached in 2007.

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