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While Gates will remain as Microsoft chairman and also take on the mantle "chief software architect", the move is perfectly timed to send a clear message to state and federal prosecutors involved in the case: breaking up Microsoft now would be an unjustifiable act given the threats faced by the company.

Ballmer denied the move had anything to do with the pending results of the DoJ anti-trust case, which could see the company broken into three - covering platforms, applications and consumer/content areas.

Nevertheless, the news has resulted in considerable media coverage, much of it outlining Microsoft's current vulnerabilities, and underlining Microsoft's view that a break-up would be vigorously resisted. Ballmer said that breaking up Microsoft "would be unprecedented", suggesting that Microsoft does not accept that the case is a rerun of the previous break-up of AT&T by the US government.

Gates will now be able to concentrate on strategy. And the move does mean that if the DoJ does opt to press ahead, Gates would be in a position to move off into one of the "baby-Microsofts", while leaving the parent in the capable hands of a man who the markets now know is every bit as competitive as Gates himself.

Current major areas of Microsoft vulnerability

1. The rise of Application Service Providers (ASPs)<

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Both Sun and HP have been endorsing these new companies which allow other companies to move all their data and management of the applications they use on to servers at the ASPs. Companies can then "rent" applications as they use them, generally over the internet and through a browser interface. This will make offices more nebulous, but also mean you can work from anywhere and still access all the programs and data you need.

This new computing paradigm seriously threatens Microsoft's revenues, which have been boosted for years by selling full copies of Office applications for every desktop PC used in a company.

Bill Gates has apparently cottoned on to the threat posed by ASPs, and now sees it as an opportunity. This week Microsoft invested in two leading US ASPs: $50 million in Digex, whose customers include Nike and Forbes, and $10 million in Corio.

2. Linux on the up:

Intel, IBM and Compaq have been among major manufacturers endorsing this alternative operating system in recent months. It poses a serious alternative to Windows, especially as it is seen as more stable in internet environments.

3. The Mega-Merger of AOL and Time Warner:

Last week's mega-merger between AOL and Time Warner, creating the fourth biggest company in the world by value, also created the biggest direct competitor that Microsoft faces.
AOL poses a threat because it is working on cheap access devices that don't use Windows (it demonstrated TV based devices at CES earlier this month), and it plans to end up out-flanking Microsoft in the vast consumer market. The key here is getting the customers online and using your content through your interface - "owning eyeballs" effectively. Microsoft will need to invest a great deal to compete with that, though it already has a mildly successful operation based on its WebTV acquisition of 1998.

Bobby Pickering