Decisive Reaction

Facing product missteps, internal dissent, talent raids, and the retirement of a key exec, Microsoft regroups into three new divisions.

During more than 20 years in the technology industry, Jim Allchin has put his imprimatur on computer networking, shed light on how people interact with machines, and ushered in systems that ward off digital miscreants. At some of the most important junctures in the PC business, Allchin has been there, riding herd on his programmers to think bigger, code better, finish faster.

Jim Allchin
The hard-driving technologist will call it quits next year after 16 years at Microsoft. But first, he has to ship Windows Vista.
That held true last week when the 15-year Microsoft veteran revealed he would retire at the end of next year. "If you want to make a difference, and you see something that can be improved, then don't talk--improve it," Allchin, 53, wrote in an E-mail to colleagues. "My dream is for a much more agile, quality-driven engineering organization with fewer roadblocks and more open highway to speed on. ... Now, let's ship, ship, ship!"

This product he's exhorting out the door is Windows Vista, which Microsoft, if it meets its schedule, will release late next year. Vista could represent high-water marks for Microsoft in software quality, ease of use, and information retrieval, but it's the roadblocks that have the company concerned. Bureaucracy, quality control, and big-company politics have rendered the next-generation operating system years late, hobbled development of digital TV and music software, and led to management departures and disgruntled employees.

Kevin Johnson
The former sales VP will take charge of Microsoft's Windows group next year--a job traditionally held by a technologist.
Meanwhile, a nimbler nemesis, Google Inc., is poaching Microsoft's staff and getting software to market over an Internet distribution channel with speed Microsoft can't match. Last week, Microsoft executives made it clear they had seen enough.

To fill the leadership gap Allchin's retirement will cause, cut infighting among development groups, and speed innovations to market, Microsoft shook up its internal structure by creating three business divisions, led by newly promoted presidents. Microsoft elevated Allchin and executive Kevin Johnson to co-presidents of a platform products and services division, which will include Windows, server software, development tools, and the MSN Internet business. Johnson will run the division when Allchin retires. Jeff Raikes becomes head of a new business-software group that includes Office and Microsoft's slow-growing business applications, while Robbie Bach takes charge of an entertainment and portable-computing division. Chief technical officer Ray Ozzie, after just six months with the company, takes on broad powers to create Internet-delivered software across all three of the divisions.

Jeff Raikes
He takes on slow-growing ERP software and will head up delivery of a new, visually different Office suite.
"While they were building a big company, lo and behold, it became a big company," says Michael Cherry, an analyst at consulting company Directions on Microsoft. "There's a great deal of frustration about how long it takes to make decisions and the amount of time people spend in meetings."

The reorg comes as Microsoft preps more than a dozen major products for release over the next year, including new versions of SQL Server and Visual Studio in November and an Office upgrade next year. The most immediate effect of the changes could be quelling internal battles among development teams for resources. By moving MSN into the same group as Windows, for example, the company hopes to cut down on duplicate work. "It's about aligning related assets and making quicker decisions," a spokesman says.

Closer alignment of MSN and Windows could also blunt Google's momentum with developers. As Google assembles massive computing and networking power around the world, its next move could be as a platform for business apps. "It doesn't take a genius to figure out that companies like us could create apps and get Google to host them," says Mark Belanger, director of technology at Web developer Fluid. "MSN would be Microsoft's response to that."

Robbie Bach
He'll lead the intro of a new Xbox, set to arrive ahead of Sony's next game machine, and has to catch Apple in digital music.
In an E-mail to Microsoft's staff last week, CEO Steve Ballmer said CTO Ozzie's technical leadership will help companies create new types of applications that combine PC and Internet software from Microsoft. Chairman Bill Gates and Ozzie have said they want to give companies the option to buy E-mail as an Internet service, deliver it to cell phones more simply, and create Internet TV that knows when to interrupt viewers for urgent messages or phone calls.

Speed to market extends to Windows, too. Gates said recently that the company will move toward more frequent releases of Windows to push out its most advanced technologies, instead of bundling everything into über-upgrades. Eric Rudder, who was in charge of Windows servers and development tools, will take on a new engineering and technical strategy role working directly with Gates.

Trouble Spots
Microsoft has had difficulty getting some highly touted development projects to measure up. The company's Media Center PC--a combination wide-screen TV, digital video recorder, and home stereo--is "way too complex" to use, says Rob Enderle, principal of consulting firm the Enderle Group. "It should have been built like an appliance with embedded Windows, but [the development team] didn't have the authority to make that happen." And portable Tablet PCs have sold short of expectations.

Ray Ozzie
The legendary programmer gets broad new powers after six months as CTO. He's in line for Gates' technical duties--if he delivers.
The company's dirty laundry got aired in nasty fashion during court proceedings this month over whether Google could employ former Microsoft executive Kai-Fu Lee. Lee, who started work at Google last week, said during testimony that he'd grown fed up with Microsoft's disorganization and red tape.

Amid such defections and Allchin's pending retirement, Microsoft is grooming its next generation of leaders. Ozzie and Rudder could take on Gates' technical responsibilities, and Kevin Turner, hired as chief operating officer from Wal-Mart Stores Inc. in August, has the background to step up to Ballmer's job. But they may have a long wait. Gates and Ballmer, both 49, haven't slowed down and could run the ship for another 10 years.

Gates plans to hit the road next month to convince computer-science majors at six universities on the East Cost and in the Midwest to work at Microsoft. The bigger task is convincing the rest of the world that Microsoft continues to incubate must-have new technologies--and isn't simply extending its software dominance by default.