Ballmer: Microsoft will make more gadgets like Surface

  @DavidGoldmanCNN October 10, 2012: 12:23 PM ET
Steve Ballmer Surface tablet

Microsoft CEO Steve Ballmer says the company will make more devices like the Surface.

NEW YORK (CNNMoney)

Microsoft is undergoing a "significant shift" in the way it does business, moving away from software as its sole focus and toward making hardware, online services and apps work together seamlessly across multiple screens and gadgets.

If that strategy sounds familiar, that's because it's embodied by Microsoft rival Apple (AAPL, Fortune 500).

CEO Steve Ballmer, who mapped out Microsoft's new course in a letter to shareholders, said he now sees Microsoft as a "devices and services company."

Microsoft (MSFT, Fortune 500) has already begun that shift by designing its first personal computer, the Surface tablet, which will go on sale Oct. 26. Ballmer said to expect more Microsoft-built gadgets in the future.

"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," Ballmer wrote. "It truly is a new era at Microsoft -- an era of incredible opportunity for us."

Microsoft will not do away with its traditional business model of selling its software to device makers, he stressed, as it will continue to work with its "vast ecosystem of partners." Ballmer believes that a dual strategy -- packaging Microsoft's software with its own devices while still licensing operating systems to other hardware makers -- will help his company expand enormous user base of 1.3 billion Windows customers across the globe.

In other words, Microsoft wants to borrow some of the tactics Apple used to become the largest tech company in the world by sales and market value, while also hanging on to the strategy that made Windows the world's most-ubiquitous operating system.

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It's a playbook that Google (GOOG, Fortune 500) is also testing out. Google's Android dominates Apple in terms of overall smartphone share, but in buying Motorola Mobility, Google catapulted itself into the consumer electronics market. It plans to follow Apple's script and better pair its software with innovative hardware offerings that it designs and manufacturers itself.

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Microsoft's strategy shift comes at a critical time for the company. The business is still performing well overall, but Windows sales fell 3% between June 2011 and June 2012, and Windows Phone has failed to catch on despite a massive advertising blitz and high-profile partnership with Nokia (NOK). Microsoft's Bing search engine, maps, Outlook e-mail and other online services have progressed more slowly than the company had hoped.

Those are the revenue streams of the future. If it doesn't start generating some hits, Microsoft risks being left behind, with a large but steadily eroding empire.

Because of those mixed results, Ballmer was one of two Microsoft executives this past year who didn't take home his full performance bonus.

Ballmer got "just" 91% of his target, or $620,000. It was his lowest bonus since 2009.

Windows chief Steven Sinofsky was the other executive who didn't get his full bonus. He took home 90% of his target bonuses and incentives, which still totaled more than $7 million.

Sinofsky and Ballmer had their bonuses trimmed in part because of the company's failure to provide a browser choice screen on European Windows PCs, as required by its 2009 antitrust settlement. Microsoft said it was an inadvertent mistake, but the European Commission said it could fine Microsoft up to $7 billion for the error. To top of page



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