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Is Steve Ballmer Fit to Run Microsoft?

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The future of the industry is mobile computing, so the success of Windows Phone 7 should determine the CEO's fate.

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Yesterday, Microsoft (MSFT) filed its 2010 proxy statement with the SEC.

I'll skip right to the good part -- CEO Steve Ballmer's performance review and explanation of his bonus award of $670,000, equal to his base salary.

Microsoft listed the following factors in its assessment of Ballmer's performance during the 2010 fiscal year:

1. Ballmer's performance against his individual commitments; the strong financial year in which Microsoft reported a record $62.5 billion in revenue and $24.1 billion in operating income.

2. The operating income performance of the company relative to 25 large technology companies; his leadership in continuing the prior year's disciplined expense management.

3. A series of successful product launches including Windows 7, Office 2010, Bing, Windows Server, and SQL Server.

4. Progress pursuing new innovations that will position the company to lead the transformation to the cloud (Azure and Office Web Apps) in active gaming (Kinect), and in other product areas in which work is well underway.

5. The unsuccessful launch of the Kin phone.

6. Loss of market share in the company's mobile phone business.

7. And the need for the company to pursue innovations to take advantage of new form factors.

Now if we look at the product mentions in this list, it's obvious that there's a heavy concentration of big-money legacy products (Windows, Office) and follow-the-leader items (Bing, Office Web Apps, Kinect) that have no discernible positive financial impact on the company.

For all the things Microsoft has done right, like making Google (GOOG) paranoid and disrupting Sony's (SNE) crown-jewel PlayStation business, it still makes all its money the same way it did 20 years ago -- by selling expensive, high-margin, full-featured software.

That was great in the PC boom days, but the 2007 release of the Apple (AAPL) iPhone represented a tipping point for mobile computing that led to the skyrocketing popularity of the rival Google Android OS, and of course, Apple's own iPad.

Numerous market research firms like Gartner and IDC have reported rapidly rising mobile-device sales numbers precisely at a time when PC sales are slowing.

Just look at the data DisplaySearch released today:

"In the second quarter of 2010, shipments of mini-note/tablet PCs were down 4% quarter over quarter, but up 29% year over year. However, without the 3.3 million iPads shipped in the quarter, shipments of mini-note/tablet PCs would have been down 14% quarter over quarter and 13% year over year." (emphasis mine)

Also today, Bernstein chopped its earnings estimates for Intel (INTC) and AMD (AMD) due to a weak third-quarter notebook PC environment, and signs that the fourth quarter isn't shaping up well. This follows a steady string of analyst number cuts for companies in the PC supply chain.

Now PCs aren't necessarily going straight to the graveyard. We could merely be watching the cycle turn at a time of great economic uncertainty.

But it's obvious that one way or another, Microsoft needs to get its mobile act together because that's where all the growth in consumer technology is.

This isn't purely a financial issue -- it's a psychological one as well. The stagnation of Microsoft's stock through multiple PC bull markets tells us that investors are worried about the company's future -- worries that are now multiplied by the company's lack of a compelling mobile-device strategy.

Now I don't really understand why media are focusing on the size of Ballmer's bonus, instead of asking whether he should be running Microsoft at all.

Steve Ballmer is a billionaire many times over -- does anyone really think he cares about the size of his annual bonus?

He's clearly motivated to make Microsoft succeed. Otherwise, he'd be relaxing on a private island instead of working at an insanely stressful 24/7/365 job.

But passion alone doesn't mean he's still the right guy for Microsoft.

Ballmer continuing on as Microsoft's CEO should be contingent upon the success of the company's upcoming Windows Phone 7 operating system.

Windows and Office have been reliable cash cows for decades, but the PC business isn't what it used to be. Mobile is the new battleground.

So if Ballmer can't get Microsoft in on the fight, he must step aside and give someone else a shot.

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