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Summary:

J. Allard and Robbie Bach — instrumental in the successes of Microsoft’s Entertainment & Devices Division — are both leaving. For now, Steve Ballmer will have more direct control over this group, which might not be the best move in the long term for Microsoft.

At a time when Microsoft is facing challengers to its desktop operating system, productivity suite and handsets, you wouldn’t think the company would be changing up officers on its front lines, yet that’s exactly what’s happening. Robbie Bach and J. Allard, both of whom were instrumental in creating consumer products through Microsoft’s Entertainment & Devices Division, are leaving the company as part of a broader reorganization, reports TechFlash. As a result, Steve Ballmer, Microsoft’s CEO, will initially gain greater control over the division, which includes the Xbox, Zune and Windows Mobile products.

J. Allard

Details on what led to the shakeup are sketchy, but more concerning is what the restructure means going forward — the departure of Bach and Allard is a huge loss for Microsoft. Add in the fact that Ballmer is often out of touch with what consumers actually want and the loss is potentially magnified, depending on how much involvement he actually has in these product areas going forward. Perhaps the best example of Ballmer’s “perception risk” comes from a 2007 interview with USA Today, in which he’s quoted as saying:

“There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.”

Given Apple’s 10.8 percent share of the worldwide smartphone sales last quarter — and Microsoft’s declining presence in that same market — it’s safe to say that Ballmer’s prognostication skills are lacking. And Windows Mobile is only just this year morphing into a more competitive Windows Phone. It’s difficult to look forward when you’re two or three years behind your competitors.

Robbie Bach

While the Windows Mobile group has been slow to respond to the fast-changing mobile market, the Xbox area has been a beacon of success for Microsoft, largely due to Allard. Incidentally, it was a 25-year-old Allard who in 1994 penned a 16-page memo titled “Windows: The Next Killer Application on the Internet,” the main thesis of which was to integrate the web within Windows, as Allard already saw the web-connected future. Between the Xbox design, 40 million consoles sold, and foretelling of the web’s importance, how does a company like Microsoft let a person with talent like this go? TechFlash says that Allard will stay an adviser to the company, so it’s not a total loss, but perhaps he should be moved up in the chain of command — not out of it.

The plan instead is for Ballmer to take the reigns, with key current leaders Andy Lees and Don Mattrick reporting directly to him. Lees has his hands full as the senior VP of Microsoft’s Mobile Communication Business, the area responsible for Windows Phone and Kin devices. As senior VP of the Interactive Entertainment Business, Mattick can build off the the Xbox successes while trying to push Zune into the limelight — a tough challenge in a world filled with iPods. And maybe an even tougher challenge the longer Ballmer runs the show.

Related content from GigaOM Pro (sub req’d):

How Microsoft Can Win Back the Tablet Market

  1. Unfortunately, the article is bang on in framing the question. The examples cited are real, and there are many more. Some of them are listed in my blog of 4/21 (“SteveB or Not SteveB”) at http://www.martinsuter.net/blog/2010/04/microsoft-steveb-or-not-steveb.html

    The real measure, however, is reflected in the stock price. Since assuming the reins as CEO, Microsoft’s stock has dropped ~45%, despite being a cash flow machine the likes of which has never before been seen, and a Balance Sheet, which (until recently) was second to none.

    That’s my .02!

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    1. “Since assuming the reins as CEO, Microsoft’s stock has dropped ~45%”

      Yes. That would be the point where Windows and Office maxed out growth opportunities by finally dominating the desktop OS and productivity suite space.

      It’s what happens when you fill a market and exponential growth stops.

      Or, in other words, it had nothing to do with Ballmer.

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      1. “Or, in other words, it had nothing to do with Ballmer.”

        Really? Did you honestly write that??

        So CEO’s are not responsible to shareholders for a company’s performance?

        Using the same logic Steve Jobs, Eric Schmidt, Marc Benioff, John Chambers and Larry Ellison deserve no credit for the returns they’ve generated during the same period for their shareholders – is that what you’re saying?

        What other company has had the capacity to spend >$1m/hour in R&D, 24x7x365 or to use their war chest to grow via acquisition at the same levels as MSFT with such meager returns?

        Sorry, but you’re wrong. The only way to measure a CEO’s performance is stock price, and SteveB’s tenure comes up wanting.

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      2. No, I’m saying you don’t understand what market saturation is.

        Incidentally profits are also a measure of a CEO’s performance. I hear MS do rather well there.

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      3. Lucian Armasu Thursday, May 27, 2010

        The stock price of Microsoft has plummeted because they haven’t excited the market with new high growth opportunities. They’ve just been growing revenue wise from inertia on the back of Windows and Office.

        Apple has launched 2 (iphone and ipad) high growth products that made the stock rise 500% in last few years.

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  2. aquietamerican Tuesday, May 25, 2010

    Not sure this is the best move for Microsoft either, but your analysis is lacking to say the least. Judging Ballmer’s foresight and prognostication skills on his public remarks as CEO is silly.

    Rightly or wrongly, Ballmer seems to believe his public role is to tell everyone that the competitors products are crap and Microsoft’s are bees-f’ing-knees. Assuming that his public comments about competitor’s products represent what he believes privately or says in strategic meetings is incredibly naive.

    In the end, this probably represents the growing importance of the consumer market to Microsoft and its future. Therefore, the CEO wants more day2day control. Bach and Allard had some big wins, but also some big failures. It’s not really that surprising that Microsoft made a change here.

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    1. “Judging Ballmer’s foresight and prognostication skills on his public remarks as CEO is silly.” True, but it’s simply an example, not the entire sole basis of an opinion. ;)

      More important is Microsoft’s declining relevance to the consumer market. It seems like only now are they just fighting back with Bing, Windows Phone 7, etc… They’re by no means out of the game, but they’re slow to react in a world where technology is changing fast.

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      1. “More important is Microsoft’s declining relevance to the consumer market.”

        So Windows 7 has been a massive failure and no-one outside corporations buys Office 2007?

        Think you might be off a bit there.

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      2. Your last point is your best point.

        This strikes me as a very important time for Microsoft’s consumer business(es) and it seems wise to consolidate the leadership.

        Is Ballmer the right guy? I’ll guess we’ll see but this is minimally an indication that Microsoft is taking this challenge seriously.

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      3. Aaron Johnson (CyKiller) Tuesday, May 25, 2010

        We usually don’t agree on most of your topics Kevin – but I have to say you are on point with this article and the comments. Keep it up – later bud.

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      4. I think that you’re right on in this reply. The author’s example is a poor one, but what other examples do we have? I mean, anything we get from Mr. Ballmer is going to be at a public event…they don’t particularly freely share the notes of their meetings…

        As a Microsoft lover–yeah, I admit it–I’ve been underwhelmed over the last ten years. I feel that Microsoft could’ve advanced technology a lot more than they have.

        XBox came out? Bought it…
        My Phone? Windows Mobile 6.1…
        Present Operating System? Windows 7… (loving it too! lol)

        One area where Microsoft needs something serious is their mobile division…and having their products work better together. This is why people have bought into the senselessness that Apples always work.

        No…they don’t…

        The lack of extensive gaming options aside, Apple Inc doesn’t allow much room for venturing outside of their products. There is no reason I should have to get iTunes to enjoy my iPod (of which I do not own BTW…)?

        I hope that Microsoft doesn’t start taking pages from Apple in how to lock their customers in. They’ve kind of done that with their Office products, but at least there’s an open software alternative (kind of)…

        I hope the next ten years show the true power that comes from having a lot of capital and a lot of innovation… Google is showing itself off…hopefully Microsoft will get that hint.

        The whole idea of using Hotmail (MS) Activesync (MS) and WM (MS), yet not being able to sync simple things like a calendar, tasks, and contacts (really) was very frustrating for me earlier this year. Thus, Android may take my mobile dollars… WP7, although it seems pretty cool, is a secondary option to me at this point because of my previous experiences…

        Either way, I’m rooting for you MS!!

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    2. Indeed. Steve Ballmer is foremost a sales guy, incidentally also a CEO.

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    3. article seems a bit misleading, Jobs has made more incorrect prediction than SteveB or Gates combined.

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  3. windows phone 7 is still not out yet so I don’t think microsoft are winning now.they are losing slowly.

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  4. Ballmer said Apple might get 2-3% of the global phone market, not the smartphone market. Gartner’s latest numbers show that Apple has a 2.7% share of the global phone market.

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    1. Fair point Alan. Semantics aside, Apple continues to grow share in a market that Microsoft could have owned. Instead, they failed to invest in the platform, which even Ballmer has admitted recently. That doesn’t instill confidence, in my opinion.

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      1. And considering Apple don’t actually own that market – they’re currently third – what’s to stop Microsoft getting a slice of the pie?

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      2. “What’s to stop Microsoft getting a slice of the pie?”

        Mark, I’m expecting you to think I’d say Apple or Google (maybe even Nokia!) but the answer to your question is Microsoft. The company has an opportunity reinvent itself and stop the declining smartphone market share with Windows Phone 7. Let’s see if they execute.

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      3. Yep. Fair enough. It depends how they execute Windows Mobile 7 I suppose.

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    2. Exactly right, and it’s more than semantics to point out Apple’s global market share. They’re on their way to repeating their PC market experience. It looks great when they’re pioneering the space with creative product and high margins, but it may not last. Their PC business was mediocre until iPod came along, wasn’t it?

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      1. “Their PC business was mediocre until iPod came along, wasn’t it?”

        It was mediocre until OS X and switching to intel from PowerPC.

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  5. Soon, all Microsoft products will be four words long and have the Windows name in them.

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    1. Everyone needs a signature /sarcasm…

      Look at Apple’s i[insert something having to do with device in one word] marketing genius…

      I’m thinking Microsoft may go the simple route and just use [insert legacy name] [insert first digit of version number]

      Whaddaya think?

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  6. XBox a “beacon of success?” Only if you’re looking at number of units sold. If you look at the financial situation it has been an utter disaster.

    By 2005 it had lost an astounding $4 billion.
    http://www.joystiq.com/2005/09/26/forbes-xbox-lost-microsoft-4-billion-and-counting/

    Only the massive sales of Windows and Office due to their illegal monopoly covers up the financial disaster that is the XBox.

    Microsoft may have made up the massive losses via lowering quality (worse than 50% failure rate http://www.joystiq.com/2009/08/17/game-informer-xbox-360-at-54-2-percent-failure-rate/ ) and sales of games and peripherals.

    However, with the added cost of R&D for “Project Natal” I seriously doubt that the XBox has added one cent of profit to Microsoft’s bottom line.

    Allard’s work and Bach’s work has give some prestige with XBox, but an embarrassment with the Zune, Courier, and Smartphone. They have been a financial disaster costing Microsoft billions. No wonder their butt’s were fired. The real question (pointing out Ballmer’s incompetence) is why they weren’t kicked out years ago.

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    1. Don, it takes a while to ramp up a profitable console line since the real money is made on titles sold. In the first quarter of this year, Xbox earned $165 million profit on revenues of $1.67 billion for the quarter, as all of the consoles are generating game sales, not to mention Xbox Live subscriptions.

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      1. Kevin, I did write that some of the massive loses from the XBox may have been made up by the sales of games and peripherals. To that you’re correct in adding subscriptions. However I would respectfully point out that Sony turned profits far more quickly with the PS3 and Nintendo has made a fortune with the Wii. Further, Microsoft doesn’t break out their R&D expenses, and with the years spent just on “Project Natal,” I doubt that they’ve actually made a profit at all. Finally, that $165 million on paper is a pittance compared to the billions they’ve lost. The only reason XBox can be seen as a success is because of the numbers distributed. If you look at the finances, a company without the illegal monopoly profits of a Microsoft would have cancelled the XBox years ago.

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      2. Oh, and the $1.67 billion income was NOT for just the XBox. It was for the entire division which includes the Zune and phones.

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      3. @Lucian

        Very true. And what do you think happens to Apple’s stock when they reach saturation point?

        Of course Apple could come out with another range of products to exploit new markets. On the other hand they might not. Would that make Steve Jobs a failure?

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  7. Didn’t they leave on their own accord, how is that Ballmer’s fault? Plus isn’t Allard staying on to “advise” Ballmer.

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    1. Justin – If Ballmer doesn’t provide an environment in which his Captains can be successful, then their leaving under any circumstance is his fault. As for Allard staying on to be an “advisor” that is just satisfying something in his pay contract. It’s a meaningly position. It’s just a way for Microsoft to save a little face and an attempt to lessen the worries of investors.

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  8. Xbox hasn’t been a success. Xbox 360 had some success, but despite the incredible errors of Sony it hasn’t gained dominance in any market except in the US. And if you consider that Xbox 360 has come out an year before the PS3, even in the US the future doesn’t look good.
    Furthermore their strategy of paying large amount of money in exchange for exclusives has eaten much of their profits. Xbox 360 has also hidden costs, like the need to pay for a subscription or a wireless adapter and that’s the reason because outside of US it hasn’t many chances to beat the PS3.

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    1. Xbox not a success? Really?

      I must tell that to the millions of people who have one and pay subscriptions to be on-line then.

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      1. I was talking about the first Xbox.

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  9. Don’t blame Balmer completely.. it all the bad karma he in herited

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  10. Kevin? Are you f-ing kidding me?
    Zune: shit.
    WebTV: history.
    Windows Media Player: shite.
    Windows Mobile: garbage.
    Xbox: as long as you don’t count the incredible amounts of money Microsoft poured into this, then it’s a success. But since we’re talking business, you kinda have to include things like money.
    Tablet computer: dead.

    What consumer/product/entertainment/device did this guy create? What was successful? Has anything these two guys done made dollar one?

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