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Ballmer Redefines Microsoft as a 'Devices and Services Company'

Though Microsoft is better known as a software company, CEO Steve Ballmer said Redmond now sees itself as a "devices and services company."

That redefinition is tucked away in a two-page "shareholder letter" from Ballmer that was published on Tuesday. The letter is part of materials designed to excite investors for the upcoming Microsoft Annual Shareholders Meeting, which will take place on Nov.28.

Microsoft has been building consumer hardware products for a while, from mouse devices to Xbox gaming consoles and a new keyboard for Windows 8 machines. In June, Microsoft announced the forthcoming production of a new tablet, the Microsoft Surface, which comes with a built-in keyboard cover. The move reportedly surprised some of Microsoft's partners, such as Acer, according to a Reuters article. Acer Chairman and CEO J.T. Wang later sought assurances from Microsoft that Acer wouldn't be undercut by Microsoft's Surface pricing.

The Windows RT version of Microsoft's Surface product is scheduled to ship on Oct. 26, while the x86 Windows 8 Pro version will arrive 90 days later. Despite Microsoft's entry into the tablet hardware market, Ballmer's letter emphasized that Microsoft still relies on its OEM partners to build tablets, PCs and phones, except when Microsoft wants to address "specific purposes."

"We do this because our customers want great choices and we believe there is no way one size suits over 1.3 billion Windows users around the world," Ballmer wrote in the letter. "There will be times when we build specific devices for specific purposes, as we have chosen to do with Xbox and the recently announced Microsoft Surface."

Microsoft's past hardware ventures haven't always lasted too long. The company killed its Kin smartphone in July 2010 after it was on the market for a couple of months. Its Courier tablet never got into production, largely because it didn't rely on Exchange for e-mail, according to this CNet account.

Office 2013 Designed for Windows 8
Ballmer's letter also described Office 2013 as "designed from the ground up for Windows 8," adding that it taps "new mobile form factors with touch and pen capabilities." He had shown off some of those touch capabilities back in July.

Microsoft plans to include a free preview version of Office 2013 Home and Student edition on Windows RT devices when they ship. However, that productivity suite will run on the "Desktop" side of the Windows RT operating system and will have some limitations compared with the x86/x64 Windows 8 version of Office 2013. For instance, the Windows RT Office 2013 version will lack support for macros and add-ins.

Ballmer concluded his letter to investors by describing some general areas of focus for Microsoft in the near future. The company plans to develop new form factors (presumably referring to hardware devices), foster machine learning to make technology "more intuitive," build and run cloud services, and push Windows as a single platform for "the PC, tablet, phone, server and cloud."

Ballmer Bonus Shortfall
Microsoft still is set to deliver products such as Windows 8 and Windows Server 2012 Essentials this year, but Ballmer's fiscal-year 2012 performance has already been evaluated by Microsoft's board. The incentive plan for Microsoft executives allows for Ballmer to get a bonus compensation that's up to 200 percent of his base salary. However, Microsoft's board doled out just 91 percent to Ballmer for fiscal year 2012, amounting to a $620,000 bonus on top of a salary of $685,000.

According to Microsoft's proxy materials, Ballmer got dinged by the board on a few items, while still getting a favorable review. The list of slip-ups includes:

  • "The 3% decline in revenue for the Windows and Windows Live Division (1% after adjusting for the impact of the Windows Upgrade Offer);

  • "Slower than planned progress in the Online Services Division; and

  • "The Windows division failure to provide a browser choice screen on certain Windows PCs in Europe as required by its 2009 commitment with the European Commission."

Ballmer took the CEO reigns from founder Bill Gates in January 2000. Since that time, the press hasn't always been so friendly to his management of the company, with a Vanity Fair article referring to Microsoft's "lost decade." However, Microsoft clearly has been trying to turn the company more toward the mobile front to catch up with market inroads held by Apple's iOS and Google's Android. The shift is also necessary given that PC growth is projected to remain flat in mature markets over the next three years even as portable device sales take off, according to projections by IDC. The research and consulting firm expects a tough market ahead for Windows 8 after finding that worldwide PC shipments contracted 8.6 percent in the third quarter of 2012.

"A weak global economy as well as questions about PC market saturation and delayed replacement cycles are certainly a factor, but the hard question of what is the 'it' product for PCs remain unanswered," stated Jay Chou, senior research analyst for IDC's Worldwide PC Tracker. "While ultrabook prices have come down a little, there are still some significant challenges that will greet Windows 8 in the coming quarter," said Chou in a released statement.

Recently, Microsoft's market capitalization estimate slipped behind Google. Microsoft's market cap was even surpassed in 2010 by Apple, a company that Bill Gates once bailed out with a $150 million Microsoft investment.

Microsoft's stock price has been critiqued by financial writers as "flat" for some time, even while the company holds onto $50 billion in cash reserves. Other favorite complaints of the number-crunching crowd include Microsoft's spending on research and development, which amounts to about $9 billion a year.

Microsoft plans to announce its first-quarter 2013 financial results at the close of the market on Oct. 18.

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