Yesterday Microsoft announced that Bill Gates would further reduce his responsibilities at Microsoft, the $40 billion company he founded in 1975. Gates had already reduced his duties, particularly in 2000, when he ceded the company CEO duties to his college friend and longtime Microsoft employee, Steve Ballmer. This announcement provided a timeline and also noted the executives that would take over Gates' current responsibilities.

The changes now, and by July 2008

Microsoft announced several important points about its executive leadership:

• Gates will take two years to transition from his current role. Gates had been the company's chief software architect, but over the next two years he will gradually remove himself from day-to-day Microsoft activities. By July 2008, he will remain chairman, but he will devote most of his time to the Bill & Melinda Gates Foundation. Working with his family, Gates will concentrate on dispensing portions of the foundation's nearly $30 billion endowment.
  
  
• Ballmer will remain the CEO. Ballmer has been CEO since January 2000, running the company's operations at a time when its revenue grew but its stock remained relatively flat. In this period, the company has been challenged by the open source movement, seen its products fall victim to malicious software and hacking, and failed to deliver key product updates on time, such as Windows Vista. Despite some vocal and public complaints -- for example, the anonymous internal blogger Mini-Microsoft -- Ballmer isn't going anywhere.
  
  
• Ozzie and Mundie become the new technical top dogs. Gates' chief software architect title is being reissued to Ray Ozzie, the Lotus Notes creator and relatively recent Microsoft employee. He was formerly chief technical officer (CTO), after joining Microsoft in April 2005 when it acquired Groove Networks. Craig Mundie, who previously was CTO of advanced strategies and policy, has been given the new title of chief research  and strategy officer. Mundie, a Microsoft employee since 1992, is best known for his work on the Windows CE (an operating system for non-PC devices) and Microsoft digital TV efforts.

Can the team of Ballmer, Ozzie, and Mundie move Microsoft beyond Windows and Office?

Under the previous technical leadership of Gates, Microsoft was having a difficult time finding and capitalizing on the next big thing. The company has and continues to make all of its money from the cash cow twins of Windows and Office (with additional profits from other server technologies). For example, the latest quarterly earnings release show:

• That the company still makes a fortune ever quarter. Microsoft announced revenue of $10.9 billion and net income of $2.98 billion.
  
  
• Windows and Office drive revenue ... Of that revenue, $8.98 billion was from only three categories: Client, Server and Tools, and information worker. O the other segments, MSN only generated $561 million, while Home and Entertainment (including the Xbox) generated $1.1 billion.
  
  
• ... and Windows and Office drive all the profits. The three revenue driving segments are responsible for all of the company's operating profit ($5.6 billion). MSN was on the hook for a loss of $26 million, while the Xbox segment recorded a loss of $388 million. Additionally, the Other segment was responsible for $1.3 billion in operating losses.
  

Obviously, the new leadership troika needs to continue to milk all it can from Windows and Office sales. But it will also have to look at not just stemming the losses, but driving profit from other segments. For example, while the Xbox 360 may have a chance to even the game console playing field, this battle with Sony continues to be a massive financial drain. At some point, segments like Home and Entertainment need to make money.

 
And Microsoft doesn't just have the challenge of making money in many of its segments. Despite its massive profits, Microsoft is also struggling to lead in the IT market. For example, the company has not been able to dominate:

• Open source and community development. Microsoft has fought a running battle with open source, trying at times to discredit it by joining in the anti-Linux campaign and at other times trying to be like open source, such as offering some of its code to partners. But the company continues to struggle with how to compete with products that have zero acquisition costs -- a price undercutting tactic that Microsoft had typically used against other companies.
  
  
• SOA, Web services, and XML. While Microsoft has been heavily involved in core technologies that underpin the SOA (service-oriented architecture) concept, such as Web services and XML (extensible markup language), the very nature of these standards-based efforts is to allow easy interoperability of IT assets and avoid vendor lock-in. Other standards, such as ODF (Open Document Format), are further weakening Microsoft's lock on customers.
  
  
• Software as services. Ray Ozzie gained some notoriety for his memo "Internet Services Disruption," which was a call to arms for Microsoft to get in on the services market. Companies like salesforce.com and Google are seen as leaders, while Microsoft has tried, but so far failed to offer services as compelling as its rivals. Its sevice-centric Live offerings have so far been unimpressive.
  
  
• AJAX and Web 2.0. As with SOA technologies, Microsoft was very important in the creation of underlying AJAX (asynchronous javascript and XML) technology, but the company has not been able to make its mark as a premier vendor of AJAX tools or even consumer services built on AJAX technology.

The rocky road ahead 

Ballmer, Ozzie, and Mundie are certainly working on solutions for each of these areas, yet they have formidable opponents and little ability to tie Windows to their solutions in a standards-dominated IT environment. IBM and Google also have plenty of money to spend, and they have both proved adept at taking advantage of the changing IT landscape. IBM sold off its PC division and is working closely with open source solutions, while Google is helping to define next-generation Net-based systems. Without the desire to embrace open source and without the ability to rely on its traditional ace in the hole -- Windows -- Microsoft will need to do more than just spend money on R&D and marketing. It must out-compete on a level playing field.

The success of this next-generation of leadership can be chartered by its ability to not just ship product upgrades, but to define and take advantage of emerging technology. If it fails to not only lead but to profit from leading, Microsoft's future could mimic that of the US auto industry, where once dominant companies with seemingly dominate positions failed over decades to reinvigorate and earn their spot in a modern industry.

As for Gates, we doubt he will be content to watch in silence as Microsoft struggles. We expect to see him lob memos -- like his famous 1995 "Internet Tidal Wave" email -- from afar to try and inspire the leaders and troops. But remember, Microsoft is where it is today under his day-to-day leadership, so Gates most likely does not have the magic potion to enable Microsoft to dominate IT like it once did.