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Associated Press
Bill Gates, at the Windows 95 launch in Redmond, Wash., in August 1995, is cutting back on his Microsoft duties to focus on his philanthropy. He will remain chairman on a part-time basis.

REDMOND, Wash. — On his final full day at Microsoft Corp., Bill Gates went on stage Friday to reminisce with his longtime friend Steve Ballmer, and neither man could hold back tears as Ballmer handed Gates a large scrapbook as a farewell present.

Gates, who is stepping back to focus on his philanthropy, sat with CEO Ballmer in a Microsoft conference room and meandered through moments in Microsoft's history. They stopped to get in a few good digs at IBM Corp., whose first personal computers were loaded with Microsoft's DOS operating system before IBM adopted its own operating software, and the companies' relations strained.

"They went off with OS 2, we were left with good old Windows, and sure enough the David vs. Goliath story came out with the right ending," said Gates, eliciting laughter from the crowd of 830 Microsoft employees.

Gates, who founded Microsoft with Paul Allen in 1975, admitted that Microsoft has faltered along the way and certainly isn't perfect today.

"When we miss a big change, when we don't get great people on it, that is the most dangerous thing for us," Gates said.

Gates, who will remain Microsoft's chairman on a part-time basis, said he would still take on Microsoft projects picked by Ballmer and two other executives who have assumed most of his day-to-day tasks, Craig Mundie and Ray Ozzie.

It is almost unthinkable that any one human could pick up where Gates left off. But as Gates bones up on epidemiology at his charitable foundation, the software company he built with a mix of visionary manifestos and extreme hands-on management must still wake up Monday to face hard problems even he could not solve. Among them: beating Google Inc. on the Web while fending off its attacks on desktop computing.

When Microsoft Corp. announced in 2006 that Gates planned to go part-time as board chairman, so he could spend more time on his global health charity, it named the two senior executives to guide the company's overall technical direction.

Gates' recent remarks, however, indicate Microsoft is looking to a much larger group of employees for big-picture guidance and long-term planning. But it's not yet clear whether the company can replicate his thinking with more traditional corporate processes — or whether it should even be trying.

From Microsoft's start in 1975, Gates has been the company's genius programmer, its technology guru, its primary decision maker and its ruthless and competitive leader. He would famously disappear into the solitude of a country cabin to digest employee-written papers and ponder the future of the industry, then emerge with manifestos, including the 1995 "Internet Tidal Wave" memo, that could shift the focus of the entire company.

He is credited by analysts and academics for the emergence of software as a moneymaking industry. Previously, it had been a pastime for hobbyists or a subset of the hardware sector. He is revered by many engineers, despite his propensity to fling expletives at underlings whose ideas he scorned. And he has built Microsoft into a hugely successful monopoly that has only grown stronger, despite major losses in antitrust trials in the United States and Europe.

At a May gathering of chief executive officers at Microsoft's Redmond, Wash., headquarters, Gates outlined how he hoped to translate the work once done within the singular confines of his brain into the sort of group projects that could be managed with the company's own collaboration software.

"We've created a thing we called quests, where we divided our types of customers down, and we got the best thinkers on these things, both the very practical people who are with the customers, the engineers who write the code, and the researchers who may be more unbound in terms of their time-frame and imagination, and put them together," Gates said.

The actual substance of the quests — which sound more Knights-of-the-Round-Table than bleeding-edge-technology — is blurry. Microsoft refused to answer questions about the subject or make Gates available for an interview. Even an analyst who was briefed under a nondisclosure agreement walked away confused.

But some details can be gleaned from Gates' comments to the CEOs and offhand references to the quests in other recent speeches. In May, Gates said the company started the quests in the last few years to help it separate its five or 10-year plans from the regular product-development cycle.

Quests are broken into five categories, based on different clumps of customers. A PowerPoint slide accompanying his talk paired each customer group with a jargony description — "Connected, informed & productive," for information workers; "Efficient and in control" for information-technology professionals.

Gates described the process to the Canadian Chamber of Commerce in February 2007 like this: "Online, we publish what we call 'quests' ... and let anybody in the company who sees that, who thinks it's stupid or they think they can contribute to it, come online, and we have the equivalent of a blog-type environment where people put up their ideas."

Last summer at the Microsoft Worldwide Partner Conference in Denver, Ballmer said the company had a list of about 70 quests. Ballmer mentioned a handful, all of them the pet projects Gates has hammered on for years: "What's the future of reading look like? What does the future of television look like? How does voice and natural language wind up as a fundamental part of the user interface metaphor for these computers and for these systems? How eventually do we get all handwriting, reading and annotation done on the computer?"

But even with Gates himself at the helm, Microsoft has yet to solve critical competitive headaches. The Internet has changed the means of distributing desktop software applications and even challenged the idea that they're necessary. Microsoft has scrambled to catch up in music players and remains an also-ran with its Zune. The most recent Windows Vista operating system landed with a thud. And Microsoft has stumbled badly in Web search and advertising, culminating in Ballmer's quixotic, $47.5 billion pursuit of Yahoo Inc.

"Some of the technical folks may even be better suited than Gates to lead the company into the next generation of computing," said Michael Silver, an analyst for Gartner who has covered Microsoft for a decade. "Some would say that maybe he had too much power. ... Some would say Microsoft hasn't failed enough, hasn't gone out on enough limbs and been as innovative as they could have been."

As a result, perpetuating Gates' thinking may leave the company ill-equipped to handle big changes in the software industry, said George Colony, founder and CEO of Forrester Research.

"They will stay in the shadow of Bill Gates, or not make any fundamental changes. Or they will take a deep breath and say, 'We'll do it the way we want to do it,"' Colony said.