The departure of Gates, who will remain the company's non- executive chairman, coincides with an escalating rivalry with Google Inc and other competitors who are using the Internet to chip away at Microsoft's software dominance.

With Gates taking a step back, the weight of Microsoft's future falls squarely on Ballmer's shoulders.

"Microsoft has to think about some radical changes within the organization to not just fix the online business, but start innovating in some of the other ones," said Sid Parakh, an analyst at McAdams Wright Ragen.

Recognizing the threat of new online rivals, Ballmer, who replaced Gates as the company's chief executive in 2000, made one of the boldest moves in Microsoft's history, with a $47.5 billion bid to buy Web pioneer Yahoo Inc.

The failure to clinch a deal has highlighted the company's shortcomings in its Web business and the urgency with which it needs to act or risk slipping farther behind Google in the growing and lucrative world of online advertising.

Analysts say Microsoft, which has grown from 30 employees in 1980, the year Ballmer joined the company, to almost 90,000 now, is not agile enough to keep up with rivals and its massive bureaucracy has stifled innovation.

"Microsoft just hasn't come up with anything all that innovative," said Andrew Loechl, director at Eagle Harbor Asset Management. "It's been buying up companies left and right for years, but it has not come up with anything internally."

Complicating matters for Microsoft is that its new set of competitors are changing the traditional rules of the game.

Microsoft has built its empire by charging one-time license fees for software such as Windows and Office, which run locally on a computer's hard drive. After a few years, it would encourage customers to upgrade to a new version of the software.

Meanwhile, its competitors are delivering software through Web browsers as a service, for which they either charge a monthly subscription or offer it for free with advertising.

CHANGES AHEAD?

The company believes in a hybrid model that combines both software and services. It is a position being advocated by the man tapped to replace Gates as Microsoft's chief software architect, Ray Ozzie.

After leaving Microsoft, Gates will work full-time at his charitable foundation, the Bill & Melinda Gates Foundation, but he will spend one day a week at the company, taking part in special projects in areas such as Web search.

Rob Helm, director of research at independent research firm Directions on Microsoft, said Gates' departure will not mean a major change in direction for the company.

"Bill and Steve broadly agree on company strategy as a whole, especially in the view point of an investor. It's about protecting the legacy," said Helm.

"Both Steve and Bill have been focused on protecting the two dominant businesses (Windows and Office) and making sure no competitor gets traction to compete in those areas."

Gates and Ballmer are the two biggest shareholders of Microsoft. Gates still holds nearly a 9 percent stake in the company, while Ballmer owns roughly 4.4 percent.

Microsoft has downplayed the exit of Gates, emphasizing that Ballmer has been the main decision maker for nearly a decade, with Gates taking on a more technical role.

During Ballmer's reign as CEO, the company has managed to protect its dominant market share in Windows and Office. It has also built an $11 billion server business and entered the video game industry with the Xbox console.

Ballmer has grown Microsoft's revenue to an estimated $67 billion this year from $25 billion in fiscal 2001. Net profit will nearly triple to an estimated $21 billion, according to analysts' estimates.

That is the positive. The negative has been the company's stock price.