The changes announced Tuesday also are designed to respond to criticism that the company has become weighed down by bureaucracy, leading to communication problems and product delays.
Microsoft said it plans to move toward more Internet-based service offerings. Products from competitors, including Web-based consumer e-mail and online updates for business software, are seen by some as a serious, long-term threat to Microsoft and its dominant Windows operating system. "It's sort of a response to the whole way computing is evolving," said Matt Rosoff with independent analysts Directions on Microsoft.
Under the changes, Ray Ozzie, a highly respected software veteran who came to Microsoft in March when it acquired his company, Groove Networks, will be charged with helping the company coordinate and improve Internet-based service offerings. These include Windows Update, the company's online tool for issuing security fixes; its MSN consumer online unit, including Web-based e-mail, instant messenger and search technology; and its Xbox Live online videogame service. Ozzie will retain his title of chief technical officer. He is one of three at the company.
Rosoff said the changes come because Microsoft needs to get better at offering online updates and other programs over the Internet to compete against rivals ranging from Salesforce.com Inc. to International Business Machines Corp.
A long-term concern is that companies such as Google could offer enough Web-based services — ranging from storing e-mail to searching computer desktops — that consumers would no longer see a need to buy the Windows operating system, Rosoff said.
In an interview with The Associated Press, Chief Executive Steve Ballmer said Microsoft also hopes to improve in other areas, such as making money from Internet advertising and selling products via subscription rather than as stand-alone items.
The company's reorganization will merge seven business units into three divisions. That is aimed at helping the company become more nimble and giving executives broader power to make decisions without bringing in top leaders. "There's a whole set of decisions that might have had to percolate to Bill Gates and I because they crossed the seven ... business groups that are now contained in these three divisions, and I think that ought to lead to crisper, faster actions on certain kinds of decisions we need to make," Ballmer said.
Former Microsoft executive Kai-Fu Lee said recently he defected to Google in part because Microsoft's bureaucracy had stifled decision-making and even made the company the butt of jokes among Chinese government officials.
One of the three new divisions, Microsoft Platform Products and Services, will include the company's Windows, server and tools, and MSN online divisions. It will be led by Kevin Johnson, formerly in charge of worldwide sales and marketing, and Jim Allchin. Allchin, a longtime executive charged with overseeing its flagship Windows operating system, will retire at the end of 2006, after the new version of Windows is released.
The other two units are Microsoft Business Divison, which will include its Office products and products for small- and mid-sized businesses, and Microsoft Entertainment and Devices Division, which will include its Xbox game console, other games, mobile phone and handheld devices products.
Analyst Rob Enderle said the hope is that the changes will reduce infighting and miscommunication, and allow products to get to market faster. "Pretty much across the board people are saying that Microsoft is dysfunctional. They are not cooperating across business groups," Enderle said. "The end result of this reorganization is to fix that — to get it so people who should be cooperating are cooperating, so they can start focusing on competitors instead of competing against themselves."
Microsoft shares fell 16 cents to $25.84 in trading Tuesday on the Nasdaq Stock Market.