The report references CEO Steve Ballmer’s annual shareholder letter, which re-characterized Microsoft as a ”devices and services company.” That is quite a shift from a company built on shipping shrink-wrapped boxes of diskettes or bundling the operating system on PCs and servers made by hardware partners IBM, HP, Dell et al. Update: Microsoft had no comment on this report.

This report comes a week after noted Microsoft watcher Nomura Securities analyst Rick Sherlund posited “big changes” to come, driven by a set of shareholders increasingly annoyed at Microsoft’s stagnant stock price. Sherlund put forth some pretty interesting options including the offloading of Bing search to Facebookor Yahoo in exchange for traffic acquisition costs or an outright sale of the Xbox franchise — a big “device” success — to another player, perhaps Samsung.

AllThingsD sources expect bigger roles to come for key Microsoft execs including Satya Nadella, president of the key Server and Tools unit — who will speak at GigaOM’s Structure later this month; Tony Bates, president of the Skype communications division; and Don Mattrick, president of Interactive Entertainment division. These are all respected executives but pressure is also building for Microsoft to bring in new blood — perhaps even at the tippy top. There have been repeated calls for Microsoft to dump Ballmer, over the years, for example.

In what could be related news, Microsoft CIO Tony Scott quietly left the company last week, news first reported by Geekwire and subsequently confirmed by Microsoft.

Microsoft is known for big, massive changes — like in the mid-1990s when it missed the internet for example. Still, these latest rumblings come at a critical time for Microsoft, which is at TechEd this week flogging Windows Azure as a key enterprise alternative to Amazon Web Services. And in a few weeks at its Build Conference, it will continue to tout Azure as well as the upcoming Windows 8.1 as a key OS for mobile devices where Microsoft is trying to make up for lost time

MSFT data by YCharts

This story was updated at 9 a.m. PDT with Microsoft’s non-comment.

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Here are some veiled semi-, sort-of predictions Sherlund put down in a research note released very early Tuesday morning:

1: Restive shareholders gain power: Sherlund thinks that shareholders are gaining steam in their  demand for a greater voice in the company’s strategic direction.  There “may be a more receptive group of frustrated shareholders to leverage in an effort to drive greater realization of shareholder value at Microsoft,” he wrote.

2: Microsoft could exit search. It could hand search off to Facebook or Yahoo in return for traffic acquisition costs, Sherlund wrote.  Microsoft Bing has gained some ground on Google but remains a distant second. The latest Comscore numbers  showed Bing with a record 17.1 percent of U.S. searches in April, up from 16.9 percent in March. Google share fell from 67.1 percent to 66.5  percent over the same period. Whether Microsoft’s gain is worth what the company spent on its BingitOn campaign, is subject to debate, however.

3: It could (gasp!) dump Xbox Sherlund acknowledges that we like to play Xbox but “it doesn’t seem like a good enough business for Microsoft to focus on.” He goes on to explain that at one point it was critical for Microsoft to “own the consumer connection to the internet” i.e. the console but as cool as it is, it’s not material to Microsoft’s broader business. More importantly, he thinks that someone, say Samsung, might pay a couple billion dollars for that business.

One thing is clear: Microsoft shareholders are one unhappy bunch. Looking at the post bubble-burst over the last 13 years, the stock price is basically flat — it’s peaked at around $37 and has bounced between that and $20 for much of that time.

That’s led to some very loud calls for CEO Steve Ballmer to head for the door — something Ballmer shows no intention of doing. Dow Jones Newswire’s  Al Smith helpfully published Ballmer’s Epitaph earlier this month, citing Windows 8 as a “bet the farm” gamble that didn’t pay off. The contention that Windows 8 is a failure has been repeated in several news outlets and is something Microsoft’s top corp comms guy couldn’t let pass. In a blog post, Frank Shaw responded that Windows 8, which has sold 100 million copies, is hardly a failure. And linked to two positive reviews.

But back to Sherlund. He senses something different in the air when it comes to Microsoft’s corporate governance:

“We think there is a shift in the wind upcoming for Microsoft,with shareholders likely demanding a greater say in the direction of the company and how it might be run to drive a better return to shareholders.”

Now we’ll just have to wait and see.

MSFT data by YCharts

This story was updated at 10:41 a.m. PDT May 28, 2013 to add comments around Microsoft’s Xbox business.

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So why is it that, with Apple being the maker of all things cool — from the iPod to the iPhone and iPad — its stock would be tanking when profits are up 45 percent? Neil Irwin at The Washington Post ventures to guess it’s because there’s no obvious “next big thing” on the horizon, Apple TV and iWatch be dammed. Well, if it was obvious to columnists, then trust us, it wasn’t worth doing. Remember, gadget reviewers adored the Palm phones.

The Touchscreen Toddlers: Whether it’s video games or TV, children’s use of technology is always up for debate. Some  parents might want to limit kids’ screen time and instead want them to focus on playing outside exploring the world, getting fresh air and exercise. The Atlantic looks at how technology affects child development, and how our tech might be causing addictive behaviors that result in major temper tantrums beyond the terrible twos.

In San Francisco, rents get bubbly: The startup boom is having a predictable impact on the San Francisco economy — real estate prices are rising faster than seed funding. When Facebook IPO’d last summer, real estate prices exploded in preparation of new millionaires. And now, it seems that it’s not just homebuyers who are finding it hard to compete with tech-millionaires.  One of San Francisco’s coveted Marina district breakfast spots is being forced out due to doubling rent, which is ironic because a large percentage of its daily patrons are work-from-anywhere startup-types that enjoy the all-day breakfast and free-flowing WiFi. Maybe it is time to look at Austin, Boston, LA, Seattle, Philadelphia and others that are coining themselves the “next Silicon Valley”. For now their real estate price tags are in the manageable range. 

Got 3D a printer, will print a gun. Debate:  3D printers might be great for homemade action figures, mini model home furniture, and battle-bots, but 3D printers also have the capacity to make dangerous goods. Take guns for example — Cody Wilson of Defense Distributed, a nonprofit focused on defending the 2nd Amendment  rights of U.S. citizens, says that for better or worse, 3D printed guns are inevitable. Good sense aside, American’s are still divided on gun control laws. But unfortunately for those who believe that guns should be restricted, they may not have a say in the matter — Wilson says he and his team have successfully fired 11 rounds from a 3D printed firearm already. With 3D printers becoming more affordable and getting mainstream coverage, that’s kind of a scary thought to grapple with.

Netflix and the Future of TV: For a company that has been disrupting the business of television and cable for past few years, we are confident in putting a premium on their outline of the future of TV. During this week’s Q1 earnings call, and in an 11-page whitepaper shared on Netflix’s investor relations site, CEO Reed Hastings laid out his $2 billion+ plan to licence hot content and create original programming to compete with the likes of HBO, Hulu, and Amazon Prime. It’s an ambitious project considering the sheer volume of choices that TV watchers have when it comes to entertainment. Netflix also announced it’s new $12 family plan, which allows subscribers to access Netflix on four screens (instead of two). While some may think that the goal here is to cut down on password sharing, Hastings says it’s not really that big of a deal. Being flippant about password sharing and piracy seems to be the avenue of choice for popular content producers – even HBO says downloading Game of Thrones illegally won’t land you in court.

Rumors at network scale: Nothing reflected the growing role of social media in our lives as does the hack of the Associated Press Twitter account, which was compromised this week. Hackers falsely tweeted that explosions at The White House had injured President Obama. Mass panic ensued and the Dow quickly lost 100 points. It seems the AP was a victim of an email phishing attack purported by the same Syrian propagandists that hacked CBS’s 60 Minutes earlier this month. We think it’s time for Twitter to add in a second layer of account protection. Not only will two-step verification help users keep their accounts safe, but it can also prove to the public that Twitter is serious about security.

And now for some stories you might have missed last week: 

• How much would you pay win an hour-long coffee date with Tim Cook? Someone is willing to shell out over a half a million. Good news – it’s also for charity.

• The PC is now an essential part of life. Much like an appliance.

• SciFi flick Oblivion had at least one thing going for it – amazing sound design.

• Speaking of sound, for the first time ever, you can now hear Alexander Graham Bell’s voice.

Kempin, who left Microsoft in 2002, was the exec who ran the company’s cash cow OEM business. He was the guy who cut the deals with hardware makers who bundled Microsoft Windows and Office on their machines. Those negotiations were by most accounts brutal, leaving hardware partners like Dell and HP reeling. They also led some to call Kempin Microsoft’s Dark Angel. And now he’s peddling a book on Microsoft and is penning a series of blogs for ReadWrite.

Here are the some of his suggestions for Microsoft from his first post:

1: Microsoft needs a tech guru. 

Kempin writes:

“The company needs a bold and charismatic executive with bona fide technical credentials to head all of its product divisions. This dynamic leader must not only serve as the main spokesperson for all products, but he or she must also inspire and command the respect of developers. (Unfortunate Ray Ozzie did not survive in this role, and the one who came after him, Craig Mundie, was from the beginning the wrong person.)”

No kidding. This is true, and it was also true when Bill Gates started stepping back from day-to-day duties at Microsoft. Even when he dubbed Ozzie his successor as chief software architect in 2006, many wondered why he didn’t go for a younger, new-age thinker; a response to the Google guys. No one doubted Ozzie’s tech vision, but by that time Microsoft had already “missed” the internet and had to make up for lost time. Ozzie was of the same generation as Gates and Ballmer. The feeling was Microsoft really needed an infusion of new blood. Ozzie was new to Microsoft but he was rooted in the same client-server world they came from. For what it’s worth, Microsoft is bleeding many of its long-time execs with Robbie Bach, J Allard and Steven Sinofsky all exiting over the past two years.

2: Go easy on the enterprise schtick

Kempin said Microsoft’s focus on enterprise customers was lucrative but hurt the company with consumers.

“… its reputation as an innovative tech leader deteriorated in the public eye. Once cool, today Microsoft is a well-oiled money machine, but the contagious excitement around the time when Windows 95 launched is long gone …. That torch has passed to the Apples, Googles, Twitters, and Facebooks of this world.”

My take: I’m not sure anyone ever thought of Microsoft as “cool.” The big flash-bang Windows 95 event was fun; but cool? Hardly. Jay Leno hosted and even in 1995 Leno was your father’s talk show host. Even many language and compiler geeks found Borland a much more amenable culture than Microsoft.

It’s true that Microsoft has gotten too enterprise-oriented. In fact, it appears hell-bent to replicate Oracle and IBM at a time when many question the relevance of those companies in a consumer IT focused world.  Even Microsoft Surface is painted with an “Office” paintbrush. Exceptions to this rule: Xbox and Kinect — which probably doesn’t carry the Microsoft brand on purpose. The reason companies update Windows and Office is to stay legal, not because of any compelling new features. Sad but true.

3: Microsoft needs to go back to school.

Kempin writes:

“The US school system is antiquated and needs to be brought into the 21st century. This presents an opportunity for Microsoft to engage and help teachers, parents, and children to excel.”

Assuming here that excel is not a pun, he has a point. Most students use Google Docs (and most of the students I know personally are using it on MacBooks.) And when is the last time you heard a student (or anyone) request a Dell (or HP or Acer) laptop running Windows?

Kempin thinks Microsoft (with help from its big cool philanthropic friend The Gates Foundation) should just underwrite a complete re-do of technology in the nation’s schools. It would be a bold move. But Microsoft still needs to make products that people want to buy, not products that they accept because they have to.

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Microsoft CEO Steve Ballmer

Citing unnamed sources, the Wall Street Journal reported that talks over the deal — at a price of about $13 or $14 per share  – continued into Sunday night. The Journal reiterated earlier reports that the buyout, worth about $22 billion, would be led by Silver Lake Partners, a private equity firm (and former employer of John Swainson, president of Dell’s Software unit) and Microsoft. Dell founder and CEO Michael Dell who owns 16 percent of the company, would keep a stake, the paper reported.

The prospect of Microsoft — which is a long-time Dell partner — holding sway over a major hardware player continues to raise eyebrows. Cozying up with one supplier — say Dell, over others such as HP, Lenovo, Acer etc…. could obviously cause problems. But Microsoft appears to be losing leverage over its traditional PC partners, most of which could be counted on to pre-load Windows on virtually all of their laptops and desktops.

As a sign of changing times, HP on Monday announced its first Chromebook, a laptop that ships with Google’s Chrome OS, not Windows. Whether that is a reaction to all this Dell-Microsoft talk or was just an inevitable hedging of bets is unclear.

For its part, Dell, which is the third-largest PC maker, offers Project Sputnik, a developer-focused laptop preloaded with Ubuntu Linux, but all of its retail PCs ship with Windows, according to The NPD Group.

The Journal last week reported that Microsoft’s role in a new Dell was a bone of contention in the talks. It’s obvious that Microsoft would want to call the shots as to what software is loaded on Dell machines from laptops to servers.

DELL data by YCharts

In a research report, Sanford Bernstein analyst Toni Sacconaghi said a deal could make sense given that Dell is relatively inexpensive; that private equity firms have a ton of cash to spend and that Michael Dell is a “committed partner” with incentives and a stake that would strongly align him with the interests of private equity buyers.

Still, people who have watched both companies for some time have a hard time envisioning Mr. Dell “working for” Microsoft CEO Steve Ballmer so if Dell does go private with Microsoft owning a significant share, stay tuned.

This story will be updated as new details emerge.

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This is how Lucovsky’s Twitter profile appeared Friday morning:

“Done with Cloud Foundry. Hand off to Pivotal Labs complete. Now hacking a mega-cloud platform for VMware with Vadim, Skaar, Oleg, Ben, and Doug.”

 According to a profile update later in the day, Lucovsky is “working on big cloud stuff at VMware.”

The timing is unclear, but last fall Lucovsky was the top gun at Cloud Foundry. A source close to Pivotal says he actually transitioned months ago, although people outside Cloud Foundry circles don’t seem to know it. VMware formally announced the Pivotal spin-off — to be headed by former VMware CEO Paul Maritz.

Lucovsky is a veteran developer. He became VP of engineering at VMware after stints as director of engineering for Google and distinguished engineer for Microsoft. His name may be familiar to non-developers because it was his exit from Microsoft to Google that caused the notorious chair-tossing incident by Microsoft CEO Steve Ballmer.

Lucovsky could not be reached for comment. In other Cloud Foundry staffing news, Jerry Chen, another top figure with the effort is on sabbatical, according to his LinkedIn profile.

The Pivotal Initiative draws on tech assets from VMware and its parent company EMC.  The goal is to bring together expertise in big data, analytics, Java frameworks and agile development, the latter from Pivotal Labs, a company acquired by EMC last year.  Since the spinoff still evolving it’s natural that there be some ebb-and-flow of personnel. Along with Maritz, Pivotal Labs president Rob Mee is helping to  manage effort.

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On the company’s earnings call, CFO Peter Klein said Microsoft had moved 60 million licenses of Windows 8 — an impressive number by any standard. But it would not talk about sales of its new Surface tablet devices. Microsoft will recognize $1.1 billion of deferred Windows-related revenue at the end of February when the deadline for discounted upgrades ends.

Microsoft launched the much-hyped Windows 8 on October 26 but the sales of Windows-based PCs, did not get a big boost.  At least at retail,  sales actually fell 11 percent in the holiday buying season compared to last year, according to the NPD Group.

To say that Microsoft CEO Steve Ballmer is on the hot seat would be an understatement, given the drubbing the company has taken for “missing” the smart phone and tablet revolution that Apple capitalized on. The company is banking that its latest edition of Windows and its Surface tablet which also debuted this fall, will make it more competitive in both arenas.

Overall Microsoft for its December quarter, logged $21.5 billion  in  revenue or 76 cents per share, compared to $20.89 billion or 78 cents per share for the same period last year. But profit fell 3 percent to $6.4 billion from $6.7 billion the year before.  Analysts surveyed by FactSet expected the company to come in at 75 cents earnings per share on $21.6 billion revenue for the quarter, according to Marketwatch.

Microsoft’s earnings release is here.

This story was updated at 3:50 p.m. PDT with additional detail from the earnings call.

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But there is a very strong enterprise technology angle here as well. Microsoft needs to entrench Hyper-V and the latest Windows Server in data centers, something a Dell stake could accelerate. “Look, Microsoft needs a phone and a tablet buddy, but it also needs to make sure its core server and virtualization technologies get deployed,” said a former Dell executive who requested anonymity. (Spokesmen for Dell and Microsoft would not comment for this story.)

Preserving the enterprise stake

“Dell, by virtue of its Wyse and Quest acquisitions has a robust zero client business and if you see a big flip in IT with people leaving local hardware and software for stuff driven from the data center via terminal services or VDI, Microsoft needs help there,” said Dana Gardner, principal analyst with Interarbor Solutions and a GigaOM Pro analyst. “It has to make sure its software is running in the data center whether it’s in the cloud or corporate,” he added.

And, mobile is also driving corporate IT in a BYOD world where Apple’s iPhone and iPad schooled both Microsoft and Dell in part because it offered a tightly integrated hardware/software bundle. Microsoft and Dell together, in theory, could offer more of that integration together.  Microsoft CEO Steve Ballmer and counterpart Michael Dell have both been under fire for failing to keep their stock prices up and the perception that they missed the boat in mobility.

MSFT data by YCharts

Still, the idea that Microsoft — which made its fortune parlaying an army of hardware partners and being careful not to play favorites — may now take a stake in a PC maker is mind boggling. Microsoft dipped its toe in hardware by deciding to make Surface, but if it wants to get serious, it needs to do something bold, and buying into Dell would be bold,Gardner said.

It also might hedge bets if HP decides to spin off or sell its PC business.  HP is another huge Microsoft hardware partner in both consumer and corporate markets.

Dell management offers clues to buyout plan

Another former Dell exec, who said he has no knowledge of any deal, said a look at the company’s leadership offers a clue as to why it might opt to take itself private.

Two top-ranking Dell execs — John Swainson, president of software, came aboard after a stint as an advisor to Silverlake Partners — the private equity firm reportedly backing a buyout. And, Marius Haas, president of enterprise services, came from Kohlberg Kravis Roberts. If a buyout happens, it’s likely that Michael Dell would step down and one of those two executives would become CEO, this source said. Swainson, who was also once CEO of CA, might be the logical choice.

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CNBC reporter David Faber characterized Microsoft’s prospective investment as part of mezzanine funding — a mix of debt and equity that typically goes to finance the expansion of an existing company — for the stressed hardware maker. Talk of Dell going private has circulated for a week or so with Silver Lake Partners reportedly driving that deal. The rumored price is $13 to $14 per share.

Dell, based in Round Rock, Texas, used to dominate the tech industry with PC sales and server sales, but missed the boat in the massive shift to mobile and smart phone computing. Dell and rival HP have both suffered from their miscues in trying to catch Apple in that booming market.

Microsoft is likewise under pressure by the mobile/phone shift. By investing in Dell — which now also offers Linux on its boxes — it could push a Windows-focused agenda. For its part, Dell has tried to lessen its dependence on commodity hardware and move more into cloud computing, storage and related services with acquisitions of EqualLogic, Compellent, Quest Software, Wyse Technology and other companies.

Some on Wall Street are not sold on a proposed buyout. Despite all those acquisitions — totaling $13 billion over 5 years,  70 percent of Dell’s business remains tied to PCs, according to Sterne Agee analyst Shaw Wu. Improvement compared to nearly 90 percent in the early 2000s, but not good enough, Wu wrote in a research note.

Redmond, Wash.-based Microsoft has invested in companies including Barnes & Noble, Facebook and others companies. Its decision to manufacture its own Surface tablets last year alienated many of its long-time hardware partners.

Microsoft CEO Steve Ballmer has taken the brunt of the blame for the company’s seeming inability to parlay its desktop operating system and applications dominance into this new era. The latest blast came from former Microsoft exec Joachim Kempin who’s inked a new book about his 20 years at Microsoft.

This story was updated at 9:50 a.m. PT with analyst comment background on Microsoft CEO Steve Ballmer.

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Mundie’s title change — from chief research and strategy officer — and retirement plans were announced internally earlier this month, but Fried surfaced the news for the rest of the world. Most of Mundie’s duties will be assumed by Eric Rudder, Microsoft’s chief technical strategy officer, Fried also reported.

According to Mundie’s updated bio:

“For more than a decade, Mundie has also been Microsoft’s principal technology-policy liaison to the U.S. and foreign governments, with an emphasis on China, India and Russia. He has served on the U.S. National Security Telecommunications Advisory Committee and the Markle Foundation Task Force on National Security in the Information Age. In April 2009 Mundie was appointed by President Barack Obama to the President’s Council of Advisors on Science and Technology.”

Mundie and Ray Ozzie shared Bill Gates’ strategic vision duties when Gates stepped down in 2006. Both Mundie and Ozzie spent early years of their respective careers at Data General, a Boston-area minicomputer maker.  Ozzie left Microsoft in 2010, in a move that caused many to question just who would drive future Microsoft’s tech vision. One of the candidates for that role, Windows group president  Steven Sinofsky, left the company in November, just after the Windows 8 launch.

While it’s no surprise for Mundie to retire, many will now wonder even more about who will set the software company’s tech agenda going forward.  Ballmer’s background is in sales and marketing.

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