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There’s a lot going on in Microsoft’s reorganization announcemen, but there’s more to it yet if you read between the lines.

It’s clear Microsoft executives know what the primary challenges are for the company: innovation and growth. Both were (perhaps not so) coincidentally highlighted in this week’s BusinessWeek cover story on what’s ailing Microsoft.

This is not a new problem. The company has always touted innovation as a key value driver, but its particular brand of innovation is more accurately described, by Steve Ballmer himself, as “learning from others.”

Microsoft reorganizes and Allchin steps down. Click here to read more.

It’s an old story. Microsoft didn’t invent the graphical user interface or the Web browser, it merely exploited and perfected them.

Most of what Microsoft considers innovation consists of adding improvements and new features on top of its core products, Windows and Office.

Real innovation, such as that being delivered by Google or Skype, and which fundamentally changes the way we work with technology, may have passed Microsoft by.

The company either has become too big to react to change, or it has run out of ways to turn the Windows and Office building blocks into next-generation services. This reorganization will have to change that.

Click here to read about the beta of Microsoft Max, which uses technology from Avalon and Indigo.

Curiously, the reorganization announcement does not mention a word about search—Google’s version of Windows, if you will—though it does say a lot about creating and enhancing the software and service “experience” for the customer.

This is the key to the growth problem. Microsoft thrived on the tech build-out in the 1990s, but now that all that infrastructure is in place, the growth has to come from the services the platforms will enable. Microsoft has long enabled developers to build those services, but revenue from services offered by Microsoft is small compared to what Windows and Office bring in.

The biggest news here is that Jim Allchin, who has been the main figure in all of Microsoft’s Windows and .Net technologies for most of the past 15 years, will be retiring by the end of next year.

Allchin will step down after the next version of Windows, Vista, ships next year. His will be big shoes to fill.

The biggest task, which falls to Kevin Johnson, will be reforming the product development cycle to enable new features, services and patches to be incorporated into Windows on an ongoing basis, rather than having the industry do the Long Wait every four or five years for the next revision.

It seems absurd to say that a company like Microsoft, so entwined in the world’s economy, could be in trouble. But it will be if the company cannot react quickly to the changing landscape, a landscape that was once Microsoft’s, but is now Google’s.

Bill, Steve & Co. have been able to reprioritize on the fly before. Whether they can do it again will determine the real legacy they will leave behind.

eWEEK magazine editor Scot Petersen can be reached at

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