Microsoft Shake-up Raises Questions About Devices, Apple

Microsoft's shake-up of its Entertainment and Devices Division has raised questions about the unit's track record with consumer products and Microsoft's ability to compete against rivals such as Google and Apple. Division initiatives such as the Zune and Kin may have positioned Microsoft badly, and Apple's rising fortunes may have contributed to the situation. Microsoft recently announced the departures of Robbie Bach, the division's president, and J Allard, its senior vice president of Design and Development.

Microsoft's shake-up of its Entertainment and Devices Division has raised questions about the company's efforts in the consumer segment, particularly in the area of smartphones, where it faces strong competition from rivals such as Google and Apple. Although Microsoft has cast the recently announced departures of two top E&D executives as being motivated by personal reasons, speculation is rife on May 26 that the sudden resignations were driven by underperforming products and killed projects.

The executives in question are Robbie Bach, the division's president, and J Allard, its senior vice president of Design and Development. Allard and Bach each logged about two decades' service with Microsoft; however, Allard will remain on board in an advisory capacity of some sort to Microsoft CEO Steve Ballmer, while the 48-year-old Bach will apparently "retire" and devote time to family and nonprofit endeavors.

Before the official announcement, rumors circulated that Allard was either on sabbatical or had resigned, reportedly after Microsoft killed his Courier tablet project. Leaked concept designs suggest Courier would have featured two touch screens linked by a hinge, giving it a booklike shape, and would have been capable of supporting everything from Web surfing to longhand note-taking. Bach's departure, however, came as more of a surprise to industry watchers.

"Robbie has been thinking about the possibility of retiring and spending more time with his family. He and I thought on whether we should go ahead and announce that now or wait until after Christmas," Ballmer told reporters in Singapore May 26, according to Reuters. "In the consumer business it has to be way before Christmas or way after Christmas ... I'm happy to make the transition and announce it now."

According to Microsoft's statement May 25, "Senior Vice President Don Mattrick will continue to lead the Interactive Entertainment Business and Senior Vice President Andy Lees will continue to lead the Mobile Communications Business. Each will report directly to CEO Steve Ballmer effective July 1." Microsoft has not yet answered eWEEK's query as to whether this new power structure means the E&D Division will be dissolved and its assets folded into other parts of the company.

Microsoft faces an uphill battle in the smartphone arena, where its Windows Mobile franchise has been losing market share in the face of strong competition from the likes of Google Android and the iPhone. The company is preparing a revamped mobile operating system, Windows Phone 7, for rollout later in 2010; however, lack of an upgrade path for devices currently running Windows Mobile, and upcoming rivals such as Android 2.3 and iPhone OS 4, represent potential barriers to adoption.

Another E&D Division product, the Zune HD portable media player, was praised by reviewers for its sleek hardware and user interface yet failed to gain a foothold among consumers. The Xbox game console franchise, while proving a notable mind-share success for Microsoft, is now edging into profitable territory after years of losses.

"Certainly, the trend has been away from Windows Mobile overall, and Zune hasn't done well," Roger Kay, an analyst with Endpoint Technologies Associates, told eWEEK. "And even Xbox 360's best days may be behind it. That doesn't leave much on E&D's plate."

During the first quarter of 2010, the division's revenues contributed about 11 percent of Microsoft's $14.5 billion bottom line. Nonetheless, some analysts insist, the track record of its products throws the unit's viability into question.

"This has been a vampire division since its inception. A vampire division is one that lives off the value created by the rest of the company and, from a corporate perspective, does more damage than good," Rob Enderle, principal analyst of the Enderle Group, said to eWEEK. "Its profit, which wasn't much, was massively offset by the economic cost it caused to the corporation and it needed to be rethought."

Enderle broke down what he perceived as the division's multitude of problems: Xbox shifting gaming resources away from Windows, Zune's killing of Plays-For-Sure, "which was closer to Microsoft's core competence and potentially more profitable," and mobile efforts such as the Kin smartphones that may "have driven partners like HP to Google." In sum, Enderle wrote, "The failed media efforts created a hole that Google recently drove through with traditional Microsoft partners Intel and Sony."

That being said, Enderle said he feels that the reorganization could spark a turnaround of sorts.

"With Apple trending to have a market cap higher than Microsoft's shortly, which is also a very likely trigger for this event, my guess is [Ballmer's] board and Gates have helped him reprioritize this function and he appears focused on it now. He did a good job helping to drive the Windows turnaround; he may be able to do this as well," Enderle said.

But the "vampire division," he added, "just had a stake driven through its heart."