* CEO Ballmer sees future in hardware, online services

* Ballmer says will build 'specific devices' when required

* Takes cut in bonus after flat year for Windows

By Bill Rigby

SEATTLE, Oct 9 (Reuters) - Microsoft Corp Chief Executive Steve Ballmer has signaled a new direction for the world's largest software company, pointing to hardware and online services as its future, taking a page from long-time rival Apple Inc.

Ballmer's comments in his annual letter to shareholders published on Tuesday suggested that Microsoft may eventually make its own phones to build on its forthcoming own-brand Surface tablet PC and market-leading Xbox gaming console.

"There will be times when we build specific devices for specific purposes, as we have chosen to do with Xbox and the recently announced Microsoft Surface," wrote Ballmer.

The new approach mimics Apple Inc, whose massively successful iPhone and iPad demonstrated tight integration of high-quality software and hardware and made Windows devices feel clunky in comparison.

Ballmer, who took over as CEO from co-founder Bill Gates in 2000, said the company would continue to work with its traditional hardware partners, such as Dell Inc, Samsung and HTC, but he made it clear that Microsoft's role in the so-called 'ecosystem' was changing.

"It impacts how we run the company, how we develop new experiences, and how we take products to market for both consumers and businesses," he wrote.

Microsoft already makes money from providing services online, such as access to servers to enable 'cloud computing', or Web versions of its Office applications, but Ballmer's new emphasis suggests an acceleration away from its traditional business model of selling installed software.

"This is a significant shift, both in what we do and how we see ourselves - as a devices and services company," he added.


BONUS CLIPPED

Alongside the shareholders' letter, Microsoft's annual proxy filing, which deals with the shareholders' meeting and other governance issues, showed that Ballmer, 56, got a lower bonus than he did last year, partly for flat sales of Windows and his failure to ensure that the company provided a choice of browser to some European customers.

He earned a bonus of $620,000 for Microsoft's 2012 fiscal year, which ended in June, down 9 percent from the year before, according to documents filed on Tuesday with the U.S. Securities and Exchange Commission.

His salary, which is low by U.S. standards for chief executives, remained essentially flat at $685,000.

It is the third year in a row that Ballmer has not earned his maximum bonus, set at twice his salary.

Microsoft's recent financial year was scarred by a $6.2 billion write-down for a failed acquisition and lower profit from its flagship Windows system as computer sales stood still.

In the company's filing, Microsoft's compensation committee said it took into account a 3 percent decline in Windows sales over the year, as well as "the Windows division failure to provide a browser choice screen on certain Windows PCs in Europe as required by its 2009 commitment with the European Commission."

Microsoft's failure to provide a browser choice in Europe was an embarrassing setback for the company, which has been embroiled in disputes with European regulators for more than a decade and paid more than $1 billion in fines for including its own Internet Explorer browser on Windows. It now faces further fines from a new investigation.

Separately, Microsoft said that independent lead director Reed Hastings, the CEO of online video rental company Netflix, would not seek reelection at the shareholder meeting in November. A new lead director will be chosen at the meeting, Microsoft said. Hastings, 51, said he wanted to focus on Netflix and his education work.

Earlier on HuffPost:

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  • Kin 1 and Kin 2

    The <a href="http://www.huffingtonpost.com/2010/07/01/microsoft-kin-dead-micros_n_631439.html" target="_hplink">Microsoft Kin</a> smartphones debuted in April 2010. Marketed for teens, the devices were priced at $50 for the Kin 1, $100 for the Kin 2. Less appealing were Verizon's $70-per-month subscription plans, as were early reviews calling the devices "<a href="http://www.huffingtonpost.com/2010/05/13/microsoft-kin-review-phot_n_574697.html" target="_hplink">not smart enough</a>" and "<a href="http://dvice.com/archives/2010/04/why-microsoft-k.php" target="_hplink">downright ugly</a>." In June, Microsoft pulled the plug on the Kin family and focused exclusively on Windows Phone 7.

  • Spot Watch

    Launched in 2004, the Smart Personal Objects Technology (SPOT) watches connected to Microsoft's FM radio-based network (MSN Direct) and delivered weather reports, news snippets, stocks and sports scores to users. <a href="http://news.cnet.com/8301-17938_105-9927213-1.html" target="_hplink">Writes</a> CNET, "Microsoft put a lot of money behind the Smart Watch and partnered up with Fossil, Suunto, Swatch, and even Tissot, which produced a high-end, touch-screen model that cost $800." Critics and consumers were not buying it, though. <em>Washington Post</em> reviewer Rob Pegoraro tested a $300 Suunto model and <a href="http://voices.washingtonpost.com/fasterforward/2008/04/microsofts_spot_watch_winds_do.html" target="_hplink">wrote</a> the following: "[It was] too big, too ugly, too useless, too expensive (especially with a $9.95/month subscription charge for Microsoft's MSN Direct data service)." The devices were discontinued in 2008.

  • Courier Tablet

    The <a href="http://www.huffingtonpost.com/2010/04/29/microsoft-courier-cancele_n_557493.html" target="_hplink">Courier Tablet</a>, leaked in 2009, was expected to be announced shortly before the iPad's debut in January 2010. According to rumors, the device would have featured two seven-inch screens that folded shut. However, this innovative twist on the tablet PC never saw the light of day. Microsoft instead unveiled a comparatively "<a href="http://www.huffingtonpost.com/2010/01/07/hp-slate-tablet-microsoft_n_414364.html" target="_hplink">underwhelming</a>" single-panel tablet device called the <a href="http://www.huffingtonpost.com/2010/01/07/hp-slate-tablet-microsoft_n_414364.html" target="_hplink">HP Slate</a>, which PCWorld called "<a href="http://www.pcworld.com/businesscenter/article/186247/hp_slate_lowers_the_bar_for_apples_tablet_pc.html#tk.mod_rel" target="_hplink">a mediocre device</a>" and "<a href="http://www.pcworld.com/article/186172/why_the_microsofthp_tablet_is_a_big_disappointment.html" target="_hplink">a big disappointment</a>." By late April, both the Courier Tablet project and the HP Slate were tabled. <blockquote><strong>UPDATE:</strong> A post written for the official Microsoft Blog in 2010 clarified that the Courier "project" was <a href="http://blogs.technet.com/b/microsoft_blog/archive/2010/04/29/speculation-about-the-courier-project.aspx" target="_hplink">never an official Microsoft product</a>. The statement read: "<em>At any given time, across any of our business groups, there are new ideas being investigated, tested, and incubated. It's in Microsoft's DNA to continually develop and incubate new technologies to foster productivity and creativity. The 'Courier' project is an example of this type of effort and its technologies will be evaluated for use in future Microsoft offerings</em>." The HP Slate was the result of a partnership between Microsoft and Hewett-Packard.</blockquote>

  • Windows Ultra-Mobile PC

    The first hand-held devices built on Microsoft's unique Ultra-Mobile PC platform launched to ample buzz in 2006. This new class of powerful mini-devices, which accepted pen and touch input, never caught on. The first U.S. release, the Samsung Q1, received <a href="http://www.pcworld.com/article/125919/mobile_computing_ultra_mobile_pc_update.html" target="_hplink">poor reviews</a> because of its hefty price tag ($1,099), buggy software, and odd keyboard design. Other releases suffered similarly.

  • The Zune

    Microsoft's answer to the iPod hasn't had a good run. The Zune's share of the mp3 player market peaked at 10%, slumping to 2% in 2009, according to <a href="http://www.investorplace.com/34097/microsoft-kills-zune-mp3-player-smartphones-windows-phone-7/" target="_hplink">Investor Place.</a> <a href="http://www.bloomberg.com/news/2011-03-14/microsoft-said-to-stop-releasing-new-zune-models-as-demand-ebbs.html" target="_hplink">Bloomberg</a> reported that Microsoft would be killing off its music player due to "tepid demand" and cease releasing new models, though it would continue developing the Zune software. <blockquote><strong>UPDATE:</strong> <a href="http://zune.net/en-US/products/software/download/default.htm" target="_hplink">Microsoft announced on October 3</a> that it "will no longer be producing Zune players."</blockquote>

  • MSN TV

    Microsoft's MSN TV (aka WebTV) was a service that allowed users to access the Internet via their televisions. The product, which may have been ahead of its time, was ultimately a flop, failing to attract more than 1 million subscribers. The <a href="http://cachef.ft.com/cms/s/0/a20ccd80-d16e-11df-96d1-00144feabdc0,s01=1.html#axzz1GxNEJiL8" target="_hplink">Financial Times</a> wrote of Microsoft's efforts, "Surfing the TV on a keyboard and web browser sounds about as enticing as pushing a rickety shopping cart across the plush carpet of a designer boutique."