July 24, 2008

Microsoft Shakes Up Windows, Online Businesses

Microsoft Chief Executive Steve Ballmer is taking direct control over two of the company's most important businesses -- including competition with Google -- in a significant reorganization announced late Wednesday afternoon.

The news came shortly after reports surfaced that Kevin Johnson, a veteran Microsoft executive in charge of a sprawling division that includes both the mainstay Windows business and the company's shakier online efforts, was leaving to head network-equipment maker Juniper Networks.

Johnson was among the Microsoft executives leading the so-far failed pursuit of Yahoo. Microsoft was at one time this year willing to pay $47.5 billion to buy the Internet giant in a bid to quickly gain ground on Google in the critical businesses of online search and advertising. But its maneuvers during the past half-year helped drive Yahoo into a search-advertising deal with Google.

Some observers were surprised by Johnson's abrupt departure, though Microsoft says the executive will work to "ensure a smooth transition."

At least one company watcher speculated Johnson might be taking the fall for the Yahoo debacle. Others saw it as a more normal transition at the top ranks of a company that has gone through a stressful year. Debate about whether to buy Yahoo reportedly divided the executive ranks.

Microsoft's decision to split Johnson's Platforms and Services Division in two and put the pieces under Ballmer fits earlier patterns the company has followed during times of transition.

"[Ballmer] has often taken direct control of certain business units for a short period of time to keep close watch on them and then turn them over to another leader," said Matt Rosoff, an analyst at Kirkland-based Directions on Microsoft.

For example, Ballmer took over the small- and midsize-business software unit in 2004 after it turned in one of the company's worst quarterly financial performances.

In late 1998, before he became CEO, Ballmer took charge of the Internet businesses to fill an unexpected vacancy. He even moved his office to the part of campus where the group was centered.

The Platforms and Services Division, with more than 14,000 employees, will go forward as two separate groups.

One will include Windows, the desktop operating system, and Windows Live, a suite of online applications such as e-mail and photo-sharing tools that Microsoft is trying to integrate more closely with the operating system.

A trio of senior vice presidents -- Steven Sinofsky, Jon DeVaan and Bill Veghte -- will head the Windows/Windows Live group, reporting directly to Ballmer.

Rosoff said that's not much of a change, considering how preoccupied Johnson seemed this year with the Yahoo acquisition. "Those guys have been heads down, working on Windows and probably talking a lot to Ballmer already," he said.

The other group is Online Services, including the company's advertising business and Internet-search efforts. This segment was the only one that reported a loss -- $1.2 billion -- in Microsoft's just-ended fiscal year, and the company announced plans to increase its investment here, signaling more losses are likely.

Microsoft had 9.2 percent of the U.S. Internet search market in June compared with Google's 61.8 percent. Buying Yahoo, or just Yahoo's search business, would help Microsoft quickly gain market share.

Microsoft did not name a new leader for Online Services, which some observers saw as a signal that Johnson's departure caught Microsoft by surprise. The company said it would conduct internal and external searches for a new executive.

"It sounds as though what really happened is Kevin either got fired or left, and they're just kind of making a patch of it," Mark Anderson, a Friday Harbor technology analyst and adviser, said of the reorganization. "If it were really something bigger, they would have already preselected the person to run the new divisions."

When Jeff Raikes, another longtime executive and division president, announced his decision to leave Microsoft in January, his replacement was named at the same time.

The Wall Street Journal reported Johnson will lead California-based Juniper Networks. Representatives from the company could not be reached for comment.

Both Raikes and Johnson were seen as possible successors to Ballmer as CEO of Microsoft. But Ballmer, 52, has made clear he has no intention of leaving in the near future.

Anderson noted that Johnson is the latest in a long line of executives who worked on Windows Vista to leave the company.

"My own opinion has been that Microsoft, while they're off worrying about Google and online advertising, really needs to worry about its core competency of creating operating systems," Anderson said.

While Microsoft says it has sold 180 million Vista licenses, the flagship product was marred by delays and poor initial reception when introduced 18 months ago. Microsoft is now at work on Vista's successor, Windows 7, due in 2010.

"Anyone on that new [Windows] team will be under a lot of pressure to do things completely differently from how Vista was managed," Anderson said.