Microsoft Store Customers try out devices at a Microsoft Corp. store in Bellevue, Washington. Photo: Bloomberg
Microsoft Corp. (MSFT) Chief Executive Officer Steve Ballmer, who will be retiring within a year, said the company is still working to make sure that the personal computer remains relevant as "the device of choice."
He made his comment as Windows, which dominated computing for more than two decades, now makes up 25 percent of revenue. The operating system slipped to become Microsoft's third-largest business after Office, which generated 32 percent of sales, and Server and Tools, which garnered 26 percent for the latest fiscal year through June.
Ballmer's remarks were being closely watched as he shakes up the world's largest software maker amid a shift by consumers toward smartphones and tablets and away from PCs running Windows. The CEO overhauled Microsoft's management and strategy to accelerate development of hardware and services, agreeing this month to buy Nokia Oyj (NOK1V)'s handset unit for $7.2 billion.
"We must do the work to ensure that the PC stays the device of choice when they're trying to be productive in life," Ballmer said at a meeting for analysts and institutional shareholders, the first in two years. Ballmer said the company will have to work hard to keep the industry "north of 300 million" units.
PC shipments will decline 9.7 percent this year to 315.4 million and won't ever return to the peak levels it reached in 2011, according to researcher IDC. The market will shrink until 2015, it said. The slumping popularity of the devices is coming as consumers increasingly turn to smartphones and tablets, two markets where Microsoft and the PC industry have lagged.
Windows accounted for 3.7 percent of smartphone operating-system shipments in the second quarter, according to IDC. In the tablet market, that figure was 4.5 percent, IDC said. Microsoft's first-ever computer hardware, the Surface tablet, sold so poorly the company had to write down $900 million of unsold inventory. Introduced in October, the handheld device was aimed at taking on Apple Inc.'s iPad, as well as touchscreen computers running Google Inc.'s Android software.
"The challenges are fairly obvious and the questions are about how to execute," said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle. "They've laid out a strategy of being more of a devices- and services-focused company, and started to execute on that. Nokia is part of that. Investors can debate whether that's the right approach, but regardless, the company is going to move on."
Some shareholders have been seeking more of a say in Microsoft's strategy and finances. The company said earlier this week it will raise quarterly dividends by 22 percent to 28 cents a share, exceeding the average analyst estimate of 26 cents. Microsoft sought to head off shareholder dissent last month by reaching a cooperation agreement with ValueAct Holdings LP, which would let the activist investor claim a board seat starting next year.
Ballmer told analysts that the company will perform better in the future by having its business, consumer, software and device units work together.
"Hardware and software will kind of need to evolve together," he said.
There are only a few companies making the investments in data centers and technology needed to provide future devices and services that consumers and companies will demand, Ballmer said. Microsoft won't be "religious" about having its services work only with Microsoft hardware, and will continue offering them on smartphones and tablets from Apple and Google, he said.
Microsoft will continue to challenge Google, which has secured pole position in Internet search and is one of the few companies with the breadth to take on Microsoft, Ballmer said. Regulators should look at what he called Google's "monopoly" in search, he said.
Microsoft said it's still seeking a new CEO, and didn't offer any updates on the process.
"The board continues on the process that we laid out in late August," Chief Financial Officer Amy Hood said at the conference, which was delayed by a power failure at the venue in Bellevue, Washington. "We'll update you when appropriate."
Hood said she'll give more detailed information on the company's new financial-reporting structure on a Sept. 26 conference call with analysts.
Microsoft shares rose 1 percent to $33.64, leaving them up 26 percent this year. The stock rose 7.3 percent the day Ballmer announced his retirement, then declined 4.6 percent when Microsoft said it would buy Nokia.
"I'm long Microsoft," said Ballmer, who owns about 4 percent of the company. "I treasure it as an investor, too."