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Originally published May 25, 2010 at 9:56 AM | Page modified May 26, 2010 at 12:00 PM

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Game-changer at Microsoft: Bach, Allard leaving

Hammered by smartphone competitors, Microsoft announced a major executive shuffle in its Entertainment and Devices division Tuesday.

Seattle Times technology reporter

In a major reorganization, Microsoft hopes to power up its video-game business and hit redial on its mobile-phone business.

Two Microsoft veterans, the fathers of Microsoft's Xbox video-game business, are leaving. Robbie Bach, the president of the Entertainment and Devices division and a 22-year employee, will retire in the fall. J Allard, senior vice president for interactive entertainment and a 19-year veteran, is leaving his job but will continue to consult for CEO Steve Ballmer as a strategic adviser.

What's at stake is the very future of computing Microsoft has envisioned: Three screens connected by a cloud. The cloud is the Internet, and the three screens are the PC, the phone and the television. The company already dominates the PC screen through Windows and Office.

The two other screens are in the Entertainment and Devices division, which includes Xbox video games, mobile phones and the Zune music player. Microsoft has made some inroads with the TV through Xbox, a solid No. 2 player in the video-game business. But on the phone, the company has been clobbered by the BlackBerry, iPhone and Google's Android.

"As a group, it hasn't been up to snuff, so Ballmer is stepping in," said Rob Enderle of the Enderle Group, a consulting firm in San Jose, Calif. "This will be a big change."

The division's senior vice presidents — Don Mattrick, now in charge of interactive entertainment, and Andy Lees, head of mobile devices — will report directly to Ballmer beginning July 1.

"For the past 22 years, Robbie has personified creativity, innovation and drive. With this spirit, he has led a division passionately devoted to making Microsoft successful in interactive entertainment and mobility," Ballmer said in a statement, calling him an "amazing business person and a close personal friend."

Bach, 48, said in the statement, "I'm at the time in my life where I want to dedicate more time to my family and my nonprofit work, including my work with the Boys & Girls Clubs of America." Bach is board chairman of the national organization.

Microsoft declined to make anyone available to comment.

Allard, 41, led many charges into the consumer world for Microsoft. In addition to building the first Xbox, he helped start the Xbox Live online network and led the team behind Zune, Microsoft's answer to the iPod.

He had been working on a booklike tablet prototype called Courier, a project Microsoft canceled in April.

Until 2008, Entertainment and Devices was a major money loser, running a loss of more than $1 billion a year. That has changed, and the division is starting to make a small profit.

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In fiscal 2009, the division saw $7.8 billion in sales and cleared $169 million in operating profit. The profit resembles a mere rounding error when compared with Microsoft's cash-cow businesses, Windows and Office.

For example, the Microsoft Business division, which develops Office software, reported $12.1 billion in operating profit on $18.9 billion in sales in fiscal 2009.

"They used to be kind of a dominating player in the smartphone-device arena," said Chetan Sharma, a Bellevue-based strategy consultant in the wireless industry. "With the introduction of Android and iPhone, their share has been decimated quarter over quarter pretty steadily."

Apple now has 15 percent market share with the iPhone, up from 11 percent a year ago. Google is up to 10 percent with Android. Microsoft, meanwhile, has fallen from 10 to 7 percent in the past 12 months, according to research firm Gartner in Framingham, Mass.

The company had already begun rebuilding its mobile-operating system under Bach's leadership, and it plans a holiday release of Windows Phone 7.

While not a technology breakthrough, it's expected to bring Microsoft up to par with the industry with a touch-screen, social-network integration, camera, consumer-friendly design and a new platform for app development.

"Windows Phone 7, when it finally comes out, will be more than three years after the iPhone started to ship," said Matt Rosoff, an analyst at Directions on Microsoft, an independent research firm in Kirkland. "That's longer than anybody would like it to take."

Sharma says the problem is "the Office mindset they have in terms of release." Microsoft needs to "get more into how others are evolving," he said. "It's [like] Twitter — you're constantly innovating, constantly fixing, rather than waiting for a large release. It cannot be a two-year-release cycle."

The video-game business, meanwhile, has built a solid foundation with Bach. The Xbox 360 video-game console is the No. 2 player behind Nintendo's Wii, ahead of Sony's PlayStation 3. Xbox Live is the most successful online network of the three, with more than 20 million regular users.

Project Natal, a motion-sensor technology, will extend the life cycle of the Xbox when it's released during the holidays.

Microsoft has been working to make Xbox its path into the living room, but competitors are hot on its heels. Google recently announced a partnership with Sony to sell Internet-connected televisions that use Google's Android operating system.

An executive earthquake of this magnitude last shook the company in 2008, when Kevin Johnson, president of the Windows and online businesses, left to become CEO of Juniper Networks in California. At the time, Microsoft was struggling with the poorly received Windows Vista and the Windows Live search engine.

Ballmer also stepped in at that time and directly managed the team working on Windows 7, which has sold well since it came out in October. He also hired an outsider, Qi Lu from Yahoo, to run the Online Services division.

Sharon Pian Chan: 206-464-2958 or schan@seattletimes.com

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