Investor calls for Ballmer’s head — but who will replace him?

Yesterday Greenlight Capital President David Einhorn — who controls $5 billion of investor money — tore Steve Ballmer a new aperture. “It’s time for Microsoft’s board to tell Steve Ballmer, ‘All right, we see what you can do, [now] let’s give so-and-so a chance.'” One has to wonder which so-and-so Einhorn had in mind.

As of March 31, Greenlight held 9 million shares of Microsoft stock worth about $220 million, or about 0.1 percent of the total. Bill Gates owns 561 million shares and Ballmer owns 333 million shares — almost 11 percent of the company, or 100 times as many shares as Greenlight — so a shareholder fight doesn’t seem imminent. I think Einhorn has a subtler plan in mind.

Einhorn’s pronouncements and explanation won’t come as a surprise to anyone who’s been watching Microsoft’s stock or its latest corporate machinations.

Microsoft cognoscenti have been calling for Ballmer’s resignation for years, with numerous examples cited: the old Vista fiasco, the 2008 Yahoo takeover that didn’t go through (billed at the time as a “failure” but now widely accepted as a blessing), laggard Office 2007 sales.

Microsoft’s problems piling up

Recently, the problems have just piled up. In the mobile arena, the Kin crashed and burned and took a whole lot of greenbacks along with it. Mango talk and Nokia subversion notwithstanding, Windows Phone 7 embarrassments continue to mount. Just last week, the headlines touted Gartner’s estimate that Microsoft had sold 1.6 million Windows Phone 7 devices in the first quarter of this year. Many news outlets soft-played the fact that Gartner also tallied 3.6 million Windows phones sold in the first quarter, leading to the inescapable conclusion that the ancient Windows Mobile 6.x still outsells Windows Phone 7 by a wide margin.

Online, Microsoft continues to pour astonishing amounts of money into Bing, buying small improvements in search market share in the United States. Earlier this month I wrote about the way Microsoft will spend about $5.5 billion on Bing this year to generate $3 billion in online revenue. Perhaps Ballmer should ditch his Excel developers and grab a calculator.

Then there’s the jump to the cloud. We all know Microsoft has to make the leap, but there have been so many public outages — Hotmail, BPOS, Azure — and the outages have been handled so poorly, with customer notifications a distant afterthought, that many of us wonder whether SteveB’s crew can handle it.

Add to that the decline in Windows 7 sales, down 4.4 percent year over year in Microsoft’s last earnings report. And the $8.5 billion Microsoft paid for Skype — which just went down again for many users.

It’s not a pretty picture. No wonder Microsoft’s stock sleeps with the fishes.

Who is Ballmer’s heir apparent?

Which brings me back to the question of which so-and-so Einhorn has in mind: If Ballmer steps aside, who’s the next in line?

I’ve written several times over the past six months about Microsoft’s executive revolving door. Bob Muglia, Ray Ozzie, Amitabh Srivastava, Stephen Elop, Robbie Bach — all are gone. Many of the top people five years ago are gone now, too: J Allard, Martin Taylor, Chris Liddell. Some long-established key people are still around, of course: Yusuf Mehdi (Bing), Chris Jones (Windows Live), Tami Reller (CFO of Windows Live), Eric Rudder (who seems to be involved in many areas). But none of them has been promoted to president of one of Microsoft’s key divisions; they aren’t leading any of the major profit and loss centers.

Back in January, I talked about the surprisingly short list of Microsoft presidents who have experience working in multiple parts of the company and came to the conclusion that Steve Sinofsky ranks as “the last man standing.”

Unless Einhorn has someone from outside the company in mind — or he’s got the inside track on somebody who’s completely off my radar — he must be looking at so-and-so Sinofsky. Interesting prospect, that.

Sinofsky is best known as The Guy Who Saved Windows. He and his formidable team took the Vista debacle and turned it into Windows 7, to great acclaim. On the downside, Sinofsky’s also known as The Guy Who Invented Ribbons. Don’t know about you, but to me that speaks volumes about Sinofsky’s vision for consumer-friendly software.

I don’t think there’s any chance Microsoft will move from Ballmer to Sinofsky in the short term. Right now, and for the next 12 to 16 months, Sinofsky’s locked in a bet-your-company battle to make the next version of Windows better than the current version. It’s a formidable task, and I doubt that anyone else can do it.

On the other hand, it’s possible that Ballmer and the Microsoft board will officially annoint Sinofsky as heir apparent, set up a transition plan, and wave some arms about Microsoft’s future direction. If Einhorn’s wake-up call gains some traction and Microsoft makes some noises about a transition from Ballmer to Sinofsky, I bet the market will react favorably.

And I bet that’s exactly what Einhorn had in mind.

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