Bloomberg News

Microsoft Revamps Business Units Playing Catchup on Web

July 11, 2013

Microsoft Corp. CEO Steve Ballmer

Microsoft Corp. Chief Executive Officer Steve Ballmer, center, and employees cheer during the grand opening of a company store in Troy, Michigan, on June 28, 2013. Photographer: Bryan Mitchell/Bloomberg

Microsoft Corp. (MSFT) Chief Executive Officer Steve Ballmer unveiled his biggest reorganization since 2002 to speed development of hardware and services at a company plagued by anemic growth and competition in mobile computing.

The software maker reduced the number of business units to four and said Windows chief Julie Larson-Green will oversee all hardware, including the Surface tablet and Xbox console and related games. Windows Phone software head Terry Myerson will add responsibility for the Windows and Xbox operating systems.

Ballmer is concentrating divisions around hardware and Internet services to appeal to customers who increasingly use mobile devices for tasks once done on desktop machines. As demand for Microsoft’s flagship Windows software ebbs amid a global personal-computer slump, Ballmer needs to slice away management layers that have hampered product development.

“First and foremost this is an attempt to address the fact that they are behind in tablet and mobile,” said Colin Gillis, an analyst at BGC Partners LP in New York. “They’re effectively saying, ‘We have some problems we need to address and we need to make radical changes to accomplish it.’”

The shares rose 2.8 percent to $35.69 in New York, the highest closing price since 2007. The stock has gained 34 percent this year, compared with a 17 percent gain for the Standard & Poor’s 500 Index.

‘Red Tape’

“Microsoft doesn’t lack for great ideas, they lack the ability to execute on these ideas,” Richard Williams, an analyst at Cross Research, said in an interview. “We’re hoping this now means there’s less red tape to go through if you have an idea.”

The shuffle reverses some changes Ballmer made in 2002 when he divided Redmond, Washington-based Microsoft into what was then seven individual product units, each led by an executive with operational and financial responsibilities.

Since then, he’s only tinkered with individual businesses. In 2011, Bob Muglia was pushed out as server chief, and in 2006 Ballmer revamped leadership of the Windows and Internet units after development delays for the Windows Vista operating system.

“To advance our strategy and execute more quickly, more efficiently, and with greater excellence we need to transform how we organize, how we plan and how we work,” Ballmer wrote in a memo to employees posted on Microsoft’s website today.

Shifts in technology and computing habits since 2002 made another overhaul necessary, according to Matthew Hedberg, an analyst at RBC Capital Markets. The new structure will help Microsoft support new products such as the Xbox One console, Yammer social-business tools and Skype videoconferencing platform, he said.

‘Changing Times’

“They rolled out the products first, refreshed their entire product portfolio, and now they’re tweaking the whole organization structure,” Hedberg said in an interview. “Changing times call for different measures.”

The reorganization also signals which executives may be poised to succeed Ballmer, who has been CEO since 2000, he said.

“If certain people emerge from this, there’s a higher likelihood that one of these division heads will succeed Ballmer,” said Hedberg, who is based in Minneapolis and rates the shares sector perform with a $32 target price.

As demand wanes for PCs, Ballmer is turning away from Microsoft’s original focus on “putting a PC on every desk in every home,” he wrote in the memo. Market research firms IDC and Gartner Inc. said yesterday that PC shipments declined about 11 percent in the second quarter, for a record fifth straight quarter of declines.

Cloud Efforts

Microsoft is also trying to challenge Amazon.com Inc. and Google Inc. in cloud services as more customers opt for software that’s run over the Web instead of installed on corporate machines.

Cloud efforts that were scattered across several divisions will now be concentrated under two units. Satya Nadella, current head of the server business, will direct cloud and enterprise products. Qi Lu, responsible for Bing and other Internet projects, will oversee Office and Skype and run a new applications group.

It will fall to Larson-Green to bolster sales of the Xbox gaming console and Surface, Microsoft’s first computer. The Surface tablet sold just 900,000 units in each of the fourth and first quarters, according to IDC, and the new Xbox underwent a rocky unveiling over the last several weeks as consumers balked at the price and restrictions on used games.

Bates, Reller

Among the other management changes, Skype president Tony Bates will run a new group for business development and acquisitions and cultivate relationships with developers and computer makers.

Tami Reller, who now leads Windows marketing, will oversee a marketing unit. The finance heads for each division will report to Amy Hood, Microsoft’s chief financial officer. Previously the CFOs in each unit reported to the head of their respective businesses.

One senior executive, Office division chief Kurt DelBene, is retiring, Microsoft said today. Xbox head Don Mattrick, previously a contender for the hardware post, left to become CEO of Zynga Inc. (ZNGA:US), a move announced July 1.

Ballmer said on a conference call today that no job cuts are planned. Microsoft will report fourth-quarter earnings on July 18 using the old group structure, Hood said on the call. Under the new organization, the company may no longer break out financial results for Bing and Internet services, BGC’s Gillis said.

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Callie Bost in New York at cbost2@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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