By NICK WINGFIELD | Wall Street Journal
Published May 26, 2010
Microsoft Corp. reorganized its entertainment division as rival Apple Inc. appeared poised to overtake it in stock market capitalization, highlighting the software behemoth's failure to ride the wave of consumer devices that is reshaping the balance of power in the technology industry.
The Redmond, Wash., company said the president of the division, Robbie Bach, will retire this fall. Another Microsoft veteran, J Allard, is also leaving. Chief Executive Steve Ballmer will take over leadership of the division with the heads of the Xbox videogame business and mobile-software business, reporting directly to Mr. Ballmer starting July 1.
Microsoft said the changes were prompted by Mr. Bach's decision to retire after 22 years at the company. The 48-year-old rose to prominence as the architect of the Xbox business but has struggled in recent years to repeat that success with mobile phones and music players.
Several former and current Microsoft executives say Mr. Bach's exit underscores a growing concern about the company's troubles in the consumer market, especially in mobile phones. Plus, new devices like Apple's iPad are threatening Microsoft's lucrative personal-computer software business by stealing shoppers who want an email and Web-browsing machine.
Mr. Ballmer has taken over parts of Microsoft's business in the past when he wasn't satisfied with performance. He took charge of its Windows business in 2008 and he oversaw the Internet-search unit for a time.
Microsoft's entertainment and devices division, which was formed in 2005 and accounts for about 11% of the company's revenue, has had its share of flops.
While the unit's Xbox business is successful, its Zune music player has failed to dent Apple's iPod business. Microsoft's mobile software, now called Windows Phone, has also lost technical ground and market share to Apple's iPhone and Google Inc.'s Android operating system. Mr. Ballmer recently killed a Microsoft project for a tablet computer called Courier.
Frank Shaw, a Microsoft spokesman, said the company has had successes in the consumer market with new products like its Windows 7 operating system, which has sold more than 100 million licenses to consumers and businesses, and Bing search engine, which has gained share in the U.S. market since its launch a year ago.
Microsoft's problem hasn't been that it was late to the consumer-device market.Michael Gartenberg, an analyst at advisory firm Altimeter Group, said Microsoft missed important consumer trends by focusing on its core business markets.
"These are all places Microsoft has been before Apple got there," said Mr. Gartenberg. "They're really things that Apple took away from Microsoft."
The shifting fortunes could be underscored in the coming weeks by a changing-of-the-guard in market capitalization. While Microsoft has long been the tech industry's most highly valued company, a little more than $6 billion now separates its $229 billion stock market value from Apple's.
That gap has narrowed from a difference of $80 billion at the end of 2009. When Mr. Ballmer assumed the role of CEO a little over a decade ago, Apple had a market value of $15.6 billion to Microsoft's $556 billion, according to data from FactSet Research Systems.
The shift is a sign of Apple's success reinventing itself in recent years with hot-selling consumer devices like the iPod, iPhone and iPad. It's also a commentary on how Microsoft has struggled to find similarly compelling new markets to help it expand beyond its Windows and Office franchises.
David Yoffie, a Harvard Business School professor, said Microsoft has suffered in comparison with Apple because the consumer market-Apple's focus-has outpaced the growth of spending on technology by businesses, Microsoft's traditional strength. "Apple has had the wind at its back," said Mr. Yoffie. "Microsoft is playing catch-up."
So far this year, Apple's stock is up 16% while Microsoft's is down 14.5%. An Apple spokesman declined comment.
Microsoft's troubles in the mobile business are one of its most glaring problems. While it focused early on making an operating system for smartphones that can send emails and run specialized applications, the company largely ignored the consumer market for such devices, which Apple's iPhone upended in 2007.
In early 2008, Mr. Ballmer rejiggered the leadership of Microsoft's mobile communications group. The team largely abandoned a new version of its operating system at the time after deciding it wasn't ambitious enough to compete with the likes of the iPhone and other devices, according to people familiar with the matter.
The decision caused delays in the completion of the software, which in turn led to important Microsoft handset partners, like Motorola Inc. and HTC Corp., working increasingly with a new software partner, Google..
Microsoft finally announced its overhauled operating system for smartphones, Windows Phone 7, in February, with a radically changed user interface and better support for touch-screens. New devices with the software are expected out this holiday season.
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