Apple overtake is fitting for Microsoft's sour week

Apple’s surpassing Microsoft in market capitalization Wednesday very much embodied the sour spirit of the Redmond company’s week, and the struggles within its Entertainment and Devices Division.

Apple, which was nearly dead 10 years ago, engineered its turnaround on the lucrative consumer market. The iPod, iTunes and iPhone propelled the Cupertino, Calif., company from the basement of Wall Street to its new status as the world’s most valuable tech firm.

Meanwhile, Microsoft has struggled to execute in those same sectors. It was late to the game with the Zune and Zune services, and while they were perfectly decent products Microsoft’s marketing abilities all but failed. In its three years, Apple’s iPhone has redefined the mobile sector while Windows Mobile has hemorrhaged market share.

“Those are where Microsoft has been squarely having its lunch money stolen both by Apple and, more recently, Google,” said Steve Kleynhans, a research vice president at Gartner. “You can’t really look there and say you’re happy with the way things are going.”

Hence the sudden retirement of EDD President Robbie Bach, who on Tuesday announced his coming departure from Microsoft after 22 years. Exiting with him by fall will be 19-year Microsoft veteran J Allard, whose official titles – chief experience officer and chief technology officer for EDD – barely give justice to his visionary leadership of the company’s consumer business.

Bach’s and Allard’s crowning achievements during the time of Apple’s resurgence have been the Xbox, Xbox Live and Xbox 360. When it introduced the original Xbox in 2001, Microsoft inserted itself into an already competitive market polarized by Sony and Nintendo – and Bach, armed with billions in marketing dollars, turned the Xbox business into a blockbuster.

But even with Xbox, Bach’s and Allard’s division struggled. Microsoft continued to post strong earnings thanks to revenue from its enterprise software, Office and Windows – despite the Windows Vista debacle – but EDD even occasionally closed a fiscal quarter in the red.

“I think Microsoft was late to markets because they didn’t necessarily recognize markets on time,” Kleynhans said. “When they entered markets, they didn’t necessarily design products (elegantly) for the usage model.”

Apple and its chief executive, Steve Jobs, realized that the everyday consumer is not tech-minded, and wants alluring products that look cool and are easy to use, Kleynhans said. Microsoft’s Entertainment and Devices Division, meanwhile, tried to push the Windows paradigm on its mobile devices.

“Look at the Xbox 360 – there’s nothing Windows-like about it,” Kleynhans said of EDD’s most successful product. “If you look at Windows Mobile, there’s a lot of Windows about it.”

At some point during the past few years – perhaps after Bill Gates left his day-to-day responsibilities in June 2008? – Microsoft’s leadership decided to change things up in the Entertainment and Devices Division. Microsoft’s started working on the next mobile operating system, Windows Phone 7, and gave it a Zune HD-like user interface and a new business model.

The Xbox team spiced things up when it introduced “Project Natal,” the upcoming controllerless-gaming add-on for Xbox 360, last summer. and April 2010′s launch of the Kin “social phone” marked a refreshed outlook on the mobile market before the scheduled holiday launch of Windows Phone 7.

“I think Microsoft felt a need to make some changes,” Michael Cherry, an analyst at Kirkland-based Directions on Microsoft, said of Bach’s and Allard’s departures. “And I think those guys decided it was time for them to move on.”

Speaking on Tuesday in Kuala Lumpur, CEO Steve Ballmer said the short-term timing was right, Reuters reported. “In the consumer business it has to be way before Christmas or way after Christmas,” he said at an unrelated event in the Malaysian capital.

But the long-term timing may also be right: well before Microsoft’s consumer-electronics division launches “Project Natal” and Windows Phone 7. and Apple’s theft Wednesday of Microsoft’s tech-company crown only further illustrates why.

As Google’s Android gains clout in the mobile operating system sector and as Apple prepares to release the fourth-generation iPhone and iPhone OS, Microsoft’s EDD leadership needs to be rock-solid. Especially as Apple tightens its stronghold on another emerging consumer sector that already represents billions in potential revenue: the tablet PC.

“It’s been product innovation. In two words, that’s basically it,” Sid Parakh, an analyst at Seattle-based McAdams Wright Ragen, said of Apple’s resurgence. “They’ve made products that people love.”

Will Microsoft’s new Entertainment and Devices Division do that too?

Apple overtake is fitting for Microsoft's sour week

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