Microsoft reorganizes and rethinks, chief architect of Yahoo bid exits

With Microsoft's stock prices down 20 percent since February, CEO Steve Ballmer is reorganizing and rethinking the company, and the chief architect of Microsoft's abandoned attempt to acquire Yahoo, Kevin Johnson, is leaving to head up communications equipment maker Juniper Networks.

In a concerted effort to catch up to Google in the online space, Microsoft is now carving up its Platform and Systems Division (PSD), formerly headed by Johnson, into two divisions: "Windows/Windows Live" and "Online."

The breakdown is slightly odd, since Windows Live was designed to be the online segment of Microsoft's primary businesses. Windows Live Seach and Live Spaces won't fall under the purview Windows Live now, but rather the Online division. Instead, the Windows Live division will focus on the software aspect (like Live Messenger and Live Desktop Mail), which links up to Microsoft's online services.

"Effective immediately, Steven Sinofsky, Jon DeVaan, and Bill Veghte will report directly to me to lead Windows/Windows Live," Ballmer said in a memo to employees yesterday in which he also addressed Microsoft's competitive strategies versus Google, Yahoo, and Apple.

"In the Online Services Business, we will create a new senior leadership position and conduct a search that will span internal and external candidates. In the meantime, Satya Nadella will continue to lead Microsoft's search, ad platform, and MSN engineering efforts, and Brian McAndrews will continue to lead the Advertiser and Publisher Solutions Group," according to Ballmer.

Also announcing Johnson's departure in the memo, Ballmer said, "Since 1992, Kevin has been a key contributor to many of this company's most important achievements."

Coinciding with Microsoft's announcements of the reorg and his own departure, Johnson said in an e-mail to Microsoft employees that he is about to become CEO at another company. Juniper has since announced that Johnson will come on board there in September.

"Being a CEO will be a new experience for me and it is the right time for me to pursue this change. I will be here partnering with Steve [Ballmer] and the PSD leadership team to ensure a thoughtful and well managed transition. I am absolutely confident in the PSD leadership team and know they will continue to drive hard on the Windows and Online Services priorities as we kick off FY09," Johnson said in his e-mail.

Johnson served as one of the key members of a team at Microsoft that launched a bid to buy Yahoo, the consistent runner-up to Google in online search and advertising, last February. When Yahoo CEO Jerry Yang kept fighting the acquisition, even after Ballmer raised the stakes to $47.5 billion, Microsoft withdrew its offer in March.

After joining Microsoft from IBM in 1992, Johnson worked his way up to become head of worldwide sales. When Johnson was named president of PSD in 2005, Ballmer reportedly gave him marching orders to beef up Microsoft's online business.

Meanwhile, signs are emerging meanwhile that Yahoo's resistance could be softening to some sort of deal with Microsoft. On Monday, Yahoo made a major concession to activist shareholder Carl Icahn -- who favors such a deal -- by expanding its board of directors to include Icahn and two additional board members nominated by Icahn.

On Tuesday, Yahoo announced mixed financial results for the second quarter of 2008, covering March through June. Although profits were down 19 percent from the same quarter last year, Yahoo's revenues rose by 6 percent.

Also in his memo to Microsoft employees yesterday, Ballmer briefly outlined Microsoft's plans in the areas of Windows, "software and services," and "business and enterprise," in addition to its competitive strategies against Google, Yahoo, and Apple.

"We continue to compete with Google on two fronts--in the enterprise, where we lead; and in search, where we trail," according to Ballmer.

"In the coming years, we'll make progress against Google in search first by upping the ante in R&D through organic innovation and strategic acquisitions. Second, we will out-innovate Google in key areas--we're already seeing this in our maps and news search. Third, we are going to reinvent the search category through user experience and business model innovation. We'll introduce new approaches that move beyond a white page with 10 blue links to provide customers with a customized view of their world. This is a long-term battle for our company--and it's one we'll continue to fight with persistence and tenacity," he told Microsoft's staff.

In his remarks about Yahoo, however, Ballmer wasn't really all that clear about whether or not Microsoft will renew its attempt at a business deal.

"Related to Google and our search strategy are the discussions we had with Yahoo. I want to emphasize the point I've been making all along--Yahoo was a tactic, not a strategy. We want to accelerate our share of search queries and create a bigger pool of advertisers, and Yahoo would have helped us get there faster. But we will get there with or without Yahoo. We have the right people, we've made incredible progress in our technology, and we'll continue to make smart investments that will enable us to build an industry-leading business," Ballmer said.

As for Apple, Ballmer noted that, "In the competition between PCs and Macs, we outsell Apple 30-to-1. But there is no doubt that Apple is thriving. Why? Because they are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience. Today, we're changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises. We'll do the same with phones -- providing choice as we work to create great end-to-end experiences."

More details on the retooling of Microsoft's business plans are likely to emerge in a meeting between Microsoft and analysts later today.