SEATTLE (Reuters) - Microsoft Corp's Robbie Bach, head of its video games and mobile phones unit, is retiring in a management shuffle, as Chief Executive Steve Ballmer tightens his grip over a division steadily ceding ground to rivals.
The departure of the 22-year veteran, credited for launching the Xbox in 2001, comes as the world's largest software maker and its mobile efforts are being brushed aside by Apple Inc's iPhone and Google Inc's Android operating system in a fast-growing, but increasingly crowded smartphone market.
"The positive for shareholders is that this is Steve Ballmer hitting the reset button on phones," said Toan Tran, an analyst at Morningstar, who described Microsoft's phone strategy as "complete disarray."
The move comes months before the launch of Microsoft's new Windows Phone 7 software, which will appear in phones this holiday shopping season. "It's probably their last chance," said Tran. "Apple and Google are so far ahead now."
Bach -- known more as a polished marketer and manager than a tech visionary -- will retire this autumn at the age of 48. He has led the entertainment and devices unit since its creation in 2005. Microsoft tends to make big executive changes close to the end of its fiscal year on June 30.
From July 1, the two senior vice presidents in charge of games and phones, Don Mattrick and Andy Lees, respectively, will report to CEO Ballmer, known for his energetic and abrasive management style.
The move replicates events at Microsoft almost two years ago, when Ballmer appointed two executives to take control of the key Windows unit after the departure of executive Kevin Johnson. The strategy paid dividends with the success of Windows 7 last year.
Bach made no mention of a new job in a statement, saying he would be spending more time with his family and on nonprofit projects.
J. Allard, the entertainment and device unit's chief technology officer -- a 19-year Microsoft veteran who led the design development of the Xbox and Zune -- is also leaving the company.
Entertainment and devices is the fourth-largest of Microsoft's five operating units -- behind its Windows, Office and server units -- and is on track to post more than $8 billion in revenue for the year ending June 30.
Last quarter, it contributed 11 percent of Microsoft's overall sales and 3 percent of its operating profit.
The unit developed the highly successful Xbox game system, but has so far failed to make an impact with its Zune digital music player and is losing ground in mobile and smartphones.
Microsoft can't afford to be eliminated from the mobile sector, analysts say, as increasingly powerful smartphones and portable tablets like Apple's iPad are poised to dominate low-end computing. Microsoft's most recent offering -- the youth-oriented, social networking-focused Kin device -- has not been a great success.
Only 10 percent of smartphones sold in the United States in the first three months of this year run Windows software, according to retail research firm NPD Group. That is well behind Apple with 21 percent, Google with 28 percent and BlackBerry-maker Research in Motion Ltd with 36 percent.
Worldwide, Google's Android passed Microsoft's Windows as the fourth most popular smartphone operating system in the first quarter, according to research firm Gartner, behind Apple, RIM and Nokia's Symbian system.
Recognizing its problems, Microsoft announced earlier this year a completely new software system for phones called Windows Phone 7, which is scheduled to hit the market in a new range of handsets for the holiday shopping season.
Some questioned the timing of Tuesday's announcement, as Microsoft gears up to unveil Natal -- its revolutionary hands-free gaming system -- at the E3 gaming show in mid-June. The company is also launching the next installment of its blockbuster Halo game in September.
The timing is "awkward," said Mike Hickey, an analyst at Janco Partners Inc, but Microsoft's plans appear to be intact.
"The initial worry is 'Uh oh, something is wrong'," said Hickey. "What's important from a product perspective is that all of their holiday launches are still on track -- Natal, Windows Phone 7, Halo Reach. So it doesn't look like it's a response to potential disruption in the near-term pipeline."
Microsoft's shares fell as much as 3.4 percent, but closed down less than 1 percent at $26.07. The Nasdaq also pared earlier losses to close down 0.1 percent.
(Reporting by Bill Rigby; additional reporting by Franklin Paul in New York; editing by Gerald E. McCormick, Lisa Von Ahn, Andre Grenon and Steve Orlofsky)