The leadership of Microsoft's entertainment division are leaving, as reported at "Bach, Allard leaving Microsoft in Big Shift for Consumer Businesses."  Whether by their own choice or by request, the issue is simply that Microsoft has not driven the XBox to a dominant position versus the Sony Playstation or the Ninendo Wii.  It is competitive, but not a big winner.  The entertainment division has only recently moved beyond break-even, after years of losing billions of dollars.  In the high-growth gaming business, Microsoft has simply not performed, despite its vast resources.  And mobile devices developed in this division have lost over half their market share in under 2 years to Apple and Google.

Some of the weakness may have been that the leaders were long-term Microsoft veterans, comfortable to Mr. Ballmer and other leaders, rather than executives committed to their markets.  Messrs. Bach and Allard were not they type of leaders to challenge the Microsoft Success Formula, instead willing to accept mediocre results rather than violate Microsoft Lock-ins that would have jeopardized their careersMicrosoft was willing to lose money, and not be a big winner, as long as the division leadership didn't challenge Lock-ins or the company focus on desktop computing products.

I'm not optimistic now that the division is reporting directly to CEO Steve Ballmer.  He had an enormous role in the company decision to commit vast resources to Defending the old Success Formula by massing hundreds of billions of dollars behind development and rollout of Office 2007, now office 2010, Vista and now System 7.  Yet, these projects have done nothing to grow Microsoft; instead only helping the company hold onto old customers.  Worse, Mr. Ballmer himself recently informed the world in his CEO Summit (as reported in Computerworld "Microsoft's Ballmer admits 'Window's Vista was just not executed well") that he's not a good leader of product development – costing the company thousands of man-years in wasted development when admittedly mismanaging Vista!

Apple v msft mkt cap 05.24.10
Chart source Business Insider

Now, largely due to the ongoing Defend & Extend management practices of Mr. Ballmer, Microsoft and Apple's valuations are in a dead heat.  Growth at Microsoft is poor, while Apple with its multiple new products is growing much faster – causing Apple's value to catch up to what has historically been the world's largest software company. 

As I commented on the recent interview for (available as a podcast) Microsoft's Defend & Extend management practices are deeply rooted in the industrial economy.  But they are insufficient for success in today's rapidly shifting marketplace.  I discussed this in more depth for my keynote address at the Western Michigan Innovation & Energy Summit last week, and a second article was published in the local newspaper on Saturday "Customer is Always Right? Columnist says not for Innovative Businesses."  Specifically, Microsoft's total commitment to maintaining old operating system and Office customers has created an inability to re-focus resources on high growth markets like gaming and mobile devices

Although Microsoft has solutions – including tablet technology – it's management is Locked-in to Defending what it always did and not committing to new growth markets.  Anyone who thinks Microsoft will be the major player in cloud computing, just because it has demonstrated some new products, must look closely at how poorly the company has developed these other growth markets.  Technology and products are not enough when management is Locked in to protecting past markets.  Microsoft is far behind Google, and has practically no catch of being a major player with so much resource dedicated to Office 2010 and System 7.

Thus investors as well as customers and employees are not doing so well at Microsoft.  In the rapidly shifting technology and gaming markets, this inability to commit to new markets is deadly.  For Microsoft, replacing the heads of the entertainment division is most likely analogous to rearranging the deck chairs on ocean liner Titanic.  The pending outcome is rapidly becoming inevitable.  Time to look for lifeboats!