Microsoft Implodes Troubled Hardware Unit

Microsoft on Tuesday reorganized its flagging hardware unit in the wake of declining sales and some recent product introductions that failed to meet expectations.

Robbie Bach, a 22-year Microsoft veteran, is out as president of the company's Entertainment & Devices Division. Bach, just 48, will "retire" in the fall, Microsoft said. Also gone in the shakeup is J Allard, who was senior VP for Design and Development in EDD.

EDD houses key consumer products like the Xbox, Zune, and Windows Mobile smartphone platform. Significantly, Microsoft did not name a replacement for Bach. Rather, CEO Steve Ballmer appears ready to exert more direct influence over the struggling unit.

Bach's reports—Interactive Entertainment Business senior VP Don Mattrick and Mobile Communications senior VP Andy Lees will now report directly to Ballmer.

"One measure of a leader is the team he assembles around him, and Robbie built an incredible team," said Ballmer, in a statement. "Don and Andy are exactly the right leaders to carry our entertainment and mobility efforts forward," said Ballmer.

The shakeup comes as Microsoft's hardware business is under siege from aggressive competitors and the company's own failure to introduce a mindshare-seizing blockbuster in the manner of, say, Apple's iPhone or iPad.

In the first nine months of Microsoft's 2010 fiscal year, hardware and hardware-related sales were down 5% year-over-year, to $6.5 billion. Xbox and PC game revenue fell 5% during that period, while Windows Mobile and Zune revenue was off 4%.

Most troubling for Ballmer is surely the fact that his company has, amid considerable fanfare, introduced a series of products that turned out to be also-rans or outright flops while rival Apple launches blockbuster after blockbuster including, most recently, the million-unit selling iPad.

An open question is how long Ballmer himself will continue to receive a pass from Microsoft's board and institutional investors.

Typifying Microsoft's hardware troubles is the KIN line of phones—a pair of mobile devices geared toward social networkers that Microsoft introduced last month. "The social generation wants more and needs more from their phone," said Bach, at the time of the launch.

"KIN is the one place to get the stuff you care about to the people you care about most," he added.

But after just weeks on the market, KIN already appears to be a bust. Initial reviews were tepid, and Amazon recently cut its price for the more advanced KIN Two by 50%, and it's now selling KIN One for once cent for customers who sign up for a service contract.

Microsoft now holds just a 6.8% share of the mobile market, down from 10.2% a year ago, according to Gartner. Worse for Redmond is that strategic rival Google is making big strides in the smartphone sector with its Android-based devices, even as Windows Mobile slumps.

Microsoft is counting on the launch of Windows Phone 7 later this year to reverse the tide, but many believe the company has already lost the battle for the smartphone market.

Adding to the chaos at Microsoft's hardware group is the fact that long-time partner Hewlett-Packard appears ready to go it alone after agreeing to purchase Palm, and its WebOS technology, for $1.2 billion last month. Shortly after the deal was announced, word leaked that HP cancelled plans for a Windows 7-powered tablet that was supposed to challenge the iPad.

The Zune MP3 player, of course, is an afterthought, but even Microsoft's highly successful Xbox franchise is under pressure as consumers eye mobile gaming, the Nintendo Wii, and alternate platforms like the iPad.

Microsoft shipped 1.5 million Xbox units in its most recent quarter, compared to 1.7 million units in the same period a year ago.

Microsoft announced other personnel moves on Tuesday, as well.

Antoine Leblond, senior VP for the Office Productivity Applications Group, will assume a new role as senior VP for Windows Web Services. Additionally, Office Business Productivity Group senior VP Kurt DelBene now assumes all engineering responsibilities for the Office group.

Microsoft launched Office 2010 earlier this month. Microsoft shares were off 2.17%, to $25.70, in mid-afternoon trading Tuesday.