Startups Technology

Microsoft aims to power mobile effort in major overhaul

12 Jul, 2013

Microsoft Corp launched its biggest internal overhaul in five years to streamline the development of products from Windows to tablets, hoping to catch nimbler rivals in mobile and cloud computing.

Lack of coordination and infighting have hurt innovation within the $74 billion revenue, 98,000-employee organization, which hopes to accelerate the design of products that appeal to a new generation of users more accustomed to smartphones and tablets than laptops or desktop PCs.

Development of Windows will now be folded into one group headed by Terry Myerson. He previously focused only on Windows Phone and now has responsibility for tailoring the flagship operating software for devices ranging from the traditional PC to tablets and gaming consoles.

Julie Larson-Green, previouly the co-chief of the main Windows division, will oversee a new division charged with all hardware devices, from the Surface tablet to the Xbox.

Nearly all of the most senior managers have a new role after the reorganization, which did not include any major new hires.

The moves re-align the company that helped revolutionize the personal computing industry in the 1980s into what Chief Executive Steve Ballmer calls a "devices and services" corporation -- a nod to Apple Inc, which has surpassed it in profit and market value in past years.

It is also an implicit rejection of "software", the business which Microsoft helped pioneer and drove the worldwide adoption of personal computing, but in which it now faces stiff competition from new rivals that have popularized Internet-based services.

Some analysts see Thursday's moves, which include centralizing business-oriented functions such as marketing and research expenses under separate units, as helping shore up Ballmer's control over the sprawling corporation.

Removing major responsbilities for profit and revenue accounting allows the main divisions to focus on innovative products and eliminates the fiefdoms -- Windows, Office for instance -- that may have encouraged infighting in recent years, analysts said.

"You don't do a major reorganization like this unless you have some serious problems," BGC analyst Colin Gillis said. "It consolidates power around the CEO."

Executives told reporters and analysts on a conference call they did not plan layoffs for now. But a certain amount of employee disruption is to be expected as the company modifies its device marketing and development strategies.

"It can be a major distraction. The details have to be ironed out, there will be a lot of water-cooler talk and that's happening as the company has some critical products coming out, like a unified phone, Xbox," Gillis said.

Microsoft's shares have gained almost 30 per cent this year, helped by a rally that began in late April when the company released strong revenue and earnings during what was one of the worst quarters for PC sales on record.

They closed Thursday up 2.8 per cent at $35.685.

Microsoft's stock hit a high of more than $59 at the height of the first dotcom boom, but have mostly been in a range of $23-$32 for the last decade. While rivals Apple and Google have shot ahead of it in market value, Microsoft is nearly unique in its staying power near the top of the tech pyramid, and its Windows and Office businesses keep it a profitable giant.

Ballmer, who took over as CEO from co-founder Bill Gates in 2000, said he wants the company to be more like Apple, which has roared past Microsoft in sales and stock market value in the past few years by smoothly melding its devices with online services such as iTunes.

He is now trying to bring products to the market faster and make the company more efficient, and wants to entice people to use Microsoft products on a variety of devices besides personal computers.

Microsoft, which has been struggling to compete in a world of mobile devices and Web-based services dominated by Apple and Google Inc, launched the Surface tablet in 2012. But the device has failed to make meaningful headway against the iPad or Android devices made by Samsung Electronics and others.

Its Windows 8 release last year also alienated PC users accustomed to a long-established interface, prompting Microsoft to bring back, among other things, the familiar "Start" button in a hasty update. All operating systems now come under Terry Myerson, who previously headed up Windows Phone and the software giant's efforts to crack the mobile market.

"We are rallying behind a single strategy as one company - not a collection of divisional strategies," Ballmer said in a memo to employees published on Microsoft's website on Thursday.

Microsoft's last significant reorganization came in July 2008 when Ballmer split Microsoft's 'Platforms & Services Division' into three separate units - Windows, Online Services and Server and Tools - in the wake of the failure to buy Yahoo.

Microsoft has been struggling with sharply declining personal computer sales that cut into its software revenue as consumers and some businesses increasingly favor smartphones and tablets. Worldwide PC shipments declined 11.4 per cent in the second quarter, the fifth consecutive quarter of year-on-year decline, according to industry research firm IDC.

Now, the four new engineering groups include Myerson's operating systems unit, and applications and services engineering to be led by Qi Lu, who previously oversaw the perennially money-losing online services arm. He also will be responsible for Office software, one of Microsoft's biggest cash cows.

Kurt DelBene, the former president of Microsoft Office, will retire. His departure follows that of gaming chief Don Mattrick, now CEO of Zynga, and Steven Sinofsky, formerly head of the Windows unit.

Satya Nadella, the company's leading authority on Internet infrastructure, takes over all Web-based cloud services such as Azure, which competes with Amazon.com Inc's AWS.

It was unclear whether the changes will mean that Microsoft will offer less financial data about certain products.

"It's a major concern if they use this opportunity to reduce the transparency, so we're hoping that's not the case," Cross Research analyst Richard Williams said.

"From a strategic perspective, it seems that they're just streamlining the operating groups to bring all...into one group, all the applications all the cloud focus, all the devices," he added. "There's a certain logic to that that makes sense to us."

Ballmer tightens grip:

Microsoft Corp's  sweeping re-organization on Thursday creates a company that, more than ever, bears the stamp of Chief Executive Steve Ballmer.

The face of Microsoft since he took the reins from co-founder Bill Gates in 2000, Ballmer stressed the importance of improving internal collaboration and eliminating redundancies when he released the company's new organizational blueprint.

But some analysts say the changes also mean less leeway for Microsoft's individual businesses to set and pursue their own agendas, as the company imposes a more streamlined, top-down approach to its strategy and operations.

For all the changes promised, the move reinforces Ballmer's grip on the company's direction and further muddies the succession picture.

"There's still no heir apparent or any succession strategy that has become apparent," said David Smith, an analyst with industry research firm Gartner. "It sounds like he wants to run it in a more centralized style."

That Ballmer, 57, who presided over a decade of share price stagnation and was deemed slow to respond to mobile computing, remains more entrenched may worry investors and spur concern that the reorganization will truly effect change.

"In theory, it's a great idea. The key question will be can Ballmer deliver this in new model and can it be successful," said Channing Smith, co-manager of the Capital Advisors Growth Fund, which does not own Microsoft shares.

"With his track record, it will be question mark for investors going forward."

Microsoft is the world's No.1 software company, whose $74 billion in annual revenue is powered largely by its dominant role in the PC business via its flagship Windows and Office software. But the company has been caught flat-footed by new trends such as mobile computing, where software by Google Inc and Apple Inc lead the pack, as well as by Web-based "cloud" services.

Investors credit Ballmer for expanding the Windows and Office franchises and growing Microsoft into one of the world's largest technology corporations.

But they also fault him for missing out on technology trends. And despite the success of the Xbox - the leader in a declining videogames industry - the company has cranked out a string of failed devices from the Zune media player to the Kin phone.

"It's been a rocky road. There's definitely been a lot of optimism around certain products, which have not met expectations," said Daniel Ives, an analyst with FBR.

Step aside?

The challenges have led to sporadic calls for Ballmer to step down, including from activist hedge fund investor Dan Loeb two years ago.

That possibility became more remote with the reorganization however, which BGC Partners analyst Colin Gillis said shored up Ballmer's control over the sprawling organization of 98,000 employees that he runs.

"If you're investing on the thesis that the CEO is going to change soon, you need to reconsider your thesis," he said.

Rob Helms, an analyst with the consulting firm Directions, said, "What this reorganization has done is taken away a lot of functions in principle from people who were reporting directly to Steve Ballmer," said .

That makes the post-Ballmer succession plan, long a concern among investors, even less clear. Under the previous structure comprised of mini-business units "there was a job short of the CEO's chair that was very much like a CEO," said Helm.

"So if you wanted to develop your career, the skills and the credibility to be Microsoft's next CEO there was a place to land. Now there really isn't."