And Get This -- Microsoft Is Giving Up On The Software Business!

Yes, the headline news at Microsoft is that CEO Steve Ballmer is out.

But a line lower down in the press release is also startling:

“The board is committed to the effective transformation of Microsoft to a successful devices and services company,” one of the company's board members said.

The effective transformation of Microsoft to a devices and services company.

In other words, Microsoft is fully acknowledging that the model that powered the company for more than 3 decades and made it one of the most powerful and richest companies in the world--sales of software--is effectively dead.

That's big news.

Microsoft has used the "devices and services" language before--Steve Ballmer wrote about it in this year's shareholder letter--but the challenge and magnitude of this transformation is much more profound than most people appreciate.

The traditional software model is, in fact, dead--or at least dying--but we can't remember Microsoft ever being so forthright about acknowledging this.

For more than a decade, Microsoft has been transitioning away from one-time sales of packaged software (Windows disks, for example) to multi-year services contracts. This has reduced the company's dependence on one-time unit sales of personal computers and software licenses and allowed it to build a business in which more of its revenue is recurring.

But the transformation of the tech industry from packaged software to services is now moving far beyond mere payment models.

Cloud-based services are now supplanting local software installations and licenses across the industry, not just for consumers who use services like Google and Facebook but for massive corporations. And this is forcing Microsoft and other major IT vendors to retool their product architectures, as well as the way they plan, develop, and roll out new product features.

Meanwhile, the trend recently re-established by Apple of selling integrated hardware and software devices has forced Microsoft to start building and selling its own integrated gadgets. This is a major transition, too.

Continuing to "transform" Microsoft from being a company driven by massive releases of packaged software every few years to a "devices and services" company will not be easy. The company's struggles in recent years will likely continue for many more years, regardless of who is CEO.

But it's encouraging to see that Microsoft now fully recognizes the challenge it faces. And it's probably wise for the company to address this challenge with a change right at the top.

SEE ALSO: Ballmer Out At Microsoft!