After Ballmer, Microsoft can at last reboot

Microsoft's announcement that Chief Executive Steve Ballmer will retire within 12 months is big news but little surprise.

Ballmer, who's led Microsoft since 2000, simply couldn't prove that he could move the company to a new course effectively. Despite years of trying, Microsoft hasn't shown an ability to keep up with Apple's mobile devices or Google's online services. When the software giant missed expectations with its quarterly earnings report in July, investors punished it by lopping $32 billion off its valuation. Compare that with Friday's 6 percent stock price increase.

Ballmer suffered three strikes in his most recent at-bat: Windows 8, Windows Phone, and Surface RT. All were technologically impressive to a degree, but none showed the necessary commercial success to prove that the company can be relied on for another decade of computing-industry dominance.

Microsoft grew powerful in the 1990s -- enough to warrant heavyweight antitrust actions because of its monopoly power in the PC market. Evidence that the company couldn't bring that dominance into new domains: Bing's 17.4 percent share of search in the US compared with Google search's 66.7 percent, and Windows Phone's 3.7 percent market share in the second quarter compared with 79.3 percent for Android and 13.2 percent for iOS.

Microsoft remains a serious contender, in part because of legacy products that still generate considerable revenue and profit. Its position in enterprise IT with products like Windows Server, Exchange, and SQL Server is solid. Corporations still rely on Microsoft Windows and Office, and they move to new technology more slowly than consumers. What's damning is that despite its engineering talent, industry relationships, and wealth, its new-era products are also-rans.

Delivering duds
Here are recent examples of Microsoft's half-measure attempts at bold change:

• Windows 8 introduced a completely new user interface for customers and a new programming foundation for developers, an interface geared for the era of touch-screen computing. But the company couldn't throw out old-style Windows, a move that would have doomed Windows 8 by extinguishing compatibility, so instead customers got an ungainly two-headed OS that combined hard-to-learn new features with hard-to-find old ones.

• Windows Phone 7 and now 8 are sleek, responsive operating systems vastly more competitive than their predecessors. But Microsoft wouldn't bring the operating system to tablets, choosing instead to reserve that hot, new market for Windows 8. When that OS arrived with a thud, Microsoft's tablet ambitions followed suit.

• The Microsoft Surface tablet embodied the company's bold hardware ambitions and its willingness to forsake Intel processors in favor of power-efficient chips from ARM. But its Windows RT operating system occupied a strange nether region between Windows Phone 8 and Windows 8. Customers couldn't get excited, and a month ago, Microsoft had to write down $900 million of Surface inventory.

Ballmer has had some recent successes, to be sure. Office 365 appears to be doing well, providing some much-needed competition to Google Apps. Internet Explorer is no longer a disgrace, which is important as the browser becomes the foundation of so much of people's computing lives. The Xbox 360 and Windows 7 delivered solidly for both customers and Microsoft's finances. Skydrive, Skype, and Hotmail are good enough to attract and keep online customers.

But bigger changes are needed.

Smart to shift
Ballmer is smart to have begun shifting his company to a new mission, a "transformation to a devices and services company focused on empowering customers in the activities they value most," as his goodbye memo to employees awkwardly phrases it. With products like the iPhone and Chromebook Pixel, Apple and Google both have shown that integrating hardware engineering, software engineering, and network services can yield products superior to those assembled from a mishmash of technology from various big suppliers.

As Ballmer is doubtless acutely aware, that transition is easier said than done -- especially for a company like Microsoft that for so long has relied on partners -- retailers, PC makers, chipmakers, resellers, and others -- to bring its products to customers. Buying Windows on its own is like buying an engine without a car.

Integrated engineering is great, but introducing products like the Microsoft Surface tablets risks alienating partners by competing with them directly.

It's easier for Microsoft rivals to push for the integrated engineering. Apple has always built its own hardware and software. Google goes halfway, with some in-house hardware like Motorola and Nexus mobile devices and Chromebook Pixel laptops but also a more Windows-like approach with the multitude of other Android device makers. Google is a newer player, though, and would-be partners would be foolish to ignore the abundant evidence that Google is willing to change its route to market dramatically and frequently.

Microsoft, in contrast, has shown itself less willing to shake things up. That's too bad, because it's exactly what the company needs to remain competitive.

Reset button
Giving Microsoft a new CEO has the potential to reset this dynamic. Ballmer is from the old-era Microsoft, but a new leader -- especially one from outside -- can send the message that Microsoft has thrown out the 2003 rule book. Partners that are just along for the ride, or that don't like competing with Microsoft can expect to be left behind. Those that show loyalty and commitment, like Nokia, can expect to be rewarded.

Likewise, a new leader will be better able to ignore Microsoft's internal turf wars and deliver my-way-or-the-highway messages to managers, engineers, and sales staff. That'll make it possible for big changes to truly move beyond the beige box.

Microsoft isn't dead. But the old Microsoft should be, and Ballmer had to step aside so a new version of the company could be born.