Is Steve Ballmer’s Fate Tied to Microsoft’s Handset Efforts?

When you’ve gone from leading the pack to a fifth-place finisher, it might be time for a change — and that’s exactly what’s going on in the mobile phone space for Microsoft (s msft) right now. Two weeks ago, Robbie Bach retired from his role as President of Microsoft’s Entertainment and Devices division, which among other products is responsible for Microsoft’s presence in the smartphone market. At that time, no plans were announced to replace Bach, leaving Steve Ballmer, the company’s CEO and biggest cheerleader with greater control. It now looks like he’s in direct control. This means that win or lose, Ballmer’s neck might be on the line.

While the Windows and Office products are perennial money-makers for Microsoft, the shift is on from desktop to mobile. Perhaps the most evident sign of that shift is exemplified by Apple’s market capitalization recent surpassing that of Microsoft’s. Yes, both companies make products for servers, laptops and desktops — Apple (s aapl) sells computers while Microsoft doesn’t — but the higher growth rates are in handsets and mobile software, two areas where Microsoft is clearly lacking. In just three years, Research In Motion (s rimm) and Apple have leapfrogged Microsoft in the sales of phones that use their respective operating systems — and in half that time, Android (s goog) is already nipping at Microsoft’s heels.

At least Ballmer is accepting reality for one of the first times that I can remember — this week at the AllThingsD conference , he admitted that Microsoft is the number five player and that Microsoft “missed a cycle” of smartphone developments as compared to competitors. People say the first step to recovery is admitting to the problem, so at least that’s out of the way. But it also signals the subtle setting of expectations, possibly for Ballmer to avoid shareholder or board backlash if Microsoft can only move up one or two spots with its new Windows Phone 7 platform — which incorporates much of Apple’s iPhone approach — due out in the third quarter of this year. Microsoft can’t afford any more smartphone stumbles if it wants to remain relevant in the future, so if Windows Phone 7 trips up, the first person asked for a reason why is sure to be Steve Ballmer.

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