Bill Gates turns over Microsoft leadership

Bill Gates turned over the sole leadership of Microsoft Corp. to Steve Ballmer yesterday. Ballmer is taking control of the company during one of the most challenging moments in its history.

Shares of the world's largest software maker are down 24 percent since Christmas, sales of Windows software are slowing, and an attempt to buy Yahoo! Inc. flopped last month.

In addition, Google Inc. is widening its lead over Microsoft in Internet searches, leaving Ballmer with a case of "chronic Google envy," according to Jane Snorek, an analyst at First American Funds in Minneapolis.

While Ballmer has been chief executive officer since 2000, founder Gates' retirement yesterday as an active chairman will leave his buddy from their student days at Harvard University alone in the spotlight and under increasing pressure to revive the shares, Snorek said.

"The No. 1 judgment of a CEO is the stock," said Snorek. "The stock hasn't recovered."

Reviving the shares may hinge on Ballmer's ability to turn around Microsoft's online-advertising business. His bid to become the No. 2 contender in the $65.2 billion industry in a single step fell through in May when he and Yahoo couldn't agree on a takeover price.

He risks being left behind if he doesn't move quickly on a new strategy, Snorek said. The Redmond, Wash., company's online business was its only unprofitable unit in the 2008 first quarter, recording a loss of $228 million. Google's net income rose to $1.31 billion.

The online services will be the one that people judge Ballmer on, said Heather Bellini, an analyst at UBS AG in New York.

Ballmer and Gates, both 52, declined to be interviewed.

Microsoft spokesman Tom Pilla said that while Web advertising was a "key priority," the company's broader effort to develop software applications that can be used online continue to represent a "tremendous opportunity."

Microsoft said two years ago that Gates, who started the company with high school friend Paul Allen in 1975, would end his day-to-day role this year to spend more time on the charitable foundation he runs with his wife, Melinda French Gates.

He will retain the chairman's title, coming in one day a week to work on projects.

Microsoft said it surpassed Lotus Development Corp. to become the largest software maker in 1987, and Gates became the world's youngest self-made billionaire, at 31. Microsoft's Windows system runs 95 percent of the world's personal computers.

"He made it look so easy, taking over the world with his operating system and making money hand over fist," Snorek said. "To defend Ballmer, he got the company when all that was over, and he's had to look for new ways to grow."

Ballmer has searched for growth by expanding into video-game consoles, digital music players and Web search engines.

The most important task now is fighting Google, Bellini at UBS said. Microsoft's share of the $21.1 billion market for U.S. Web ads slipped to 6.7 percent in 2007 from 9.6 percent in 2004, according to New York researcher eMarketer Inc. Google's share more than doubled, to 28.4 percent from 13.1 percent.

Microsoft in 2006 intensified efforts to catch Google, of Mountain View, Calif., by doubling its Internet workforce and adding features to its MSN business. Microsoft also acquired Seattle-based online marketing firm aQuantive Inc. last year for $6 billion.

In May, Microsoft offered to buy Yahoo for $33 a share, or $47.5 billion. After Ballmer and Yahoo CEO Jerry Yang failed to agree on a price, Microsoft offered to buy just the search unit. Yahoo rejected that bid in favor of a partnership with Google.

Microsoft's Pilla said revenue has almost doubled in the last six years and Microsoft had returned more than $100 billion to investors. The company pays a dividend of 11 cents a share quarterly and has repurchased $66.4 billion in shares since 2004.