UPDATE 1-Microsoft CEO sees company becoming more like Apple

* CEO Ballmer sees future in hardware, online services

* Ballmer says will build 'specific devices' when required

* Takes cut in bonus after flat year for Windows

(Recasts, adds Ballmer quotes on strategy, background)

By Bill Rigby

SEATTLE, Oct 9 (Reuters) - Microsoft Corp ChiefExecutive Steve Ballmer has signaled a new direction for theworld's largest software company, pointing to hardware andonline services as its future, taking a page from long-timerival Apple Inc .

Ballmer's comments in his annual letter to shareholderspublished on Tuesday suggested that Microsoft may eventuallymake its own phones to build on its forthcoming own-brandSurface tablet PC and market-leading Xbox gaming console.

"There will be times when we build specific devices forspecific purposes, as we have chosen to do with Xbox and therecently announced Microsoft Surface," wrote Ballmer.

The new approach mimics Apple Inc , whose massivelysuccessful iPhone and iPad demonstrated tight integration ofhigh-quality software and hardware and made Windows devices feelclunky in comparison.

Ballmer, who took over as CEO from co-founder Bill Gates in2000, said the company would continue to work with itstraditional hardware partners, such as Dell Inc ,Samsung and HTC , but he made it clear thatMicrosoft's role in the so-called 'ecosystem' was changing.

"It impacts how we run the company, how we develop newexperiences, and how we take products to market for bothconsumers and businesses," he wrote.

Microsoft already makes money from providing servicesonline, such as access to servers to enable 'cloud computing',or Web versions of its Office applications, but Ballmer's newemphasis suggests an acceleration away from its traditionalbusiness model of selling installed software.

"This is a significant shift, both in what we do and how wesee ourselves - as a devices and services company," he added.


Alongside the shareholders' letter, Microsoft's annual proxyfiling, which deals with the shareholders' meeting and othergovernance issues, showed that Ballmer, 56, got a lower bonusthan he did last year, partly for flat sales of Windows and hisfailure to ensure that the company provided a choice of browserto some European customers.

He earned a bonus of $620,000 for Microsoft's 2012 fiscalyear, which ended in June, down 9 percent from the year before,according to documents filed on Tuesday with the U.S. Securitiesand Exchange Commission.

His salary, which is low by U.S. standards for chiefexecutives, remained essentially flat at $685,000.

It is the third year in a row that Ballmer has not earnedhis maximum bonus, set at twice his salary.

Microsoft's recent financial year was scarred by a $6.2billion write-down for a failed acquisition and lower profitfrom its flagship Windows system as computer sales stood still.

In the company's filing, Microsoft's compensation committeesaid it took into account a 3 percent decline in Windows salesover the year, as well as "the Windows division failure toprovide a browser choice screen on certain Windows PCs in Europeas required by its 2009 commitment with the EuropeanCommission."

Microsoft's failure to provide a browser choice in Europewas an embarrassing setback for the company, which has beenembroiled in disputes with European regulators for more than adecade and paid more than $1 billion in fines for including itsown Internet Explorer browser on Windows. It now faces furtherfines from a new investigation.

Separately, Microsoft said that independent lead directorReed Hastings, the CEO of online video rental company Netflix,would not seek reelection at the shareholder meeting inNovember. A new lead director will be chosen at the meeting,Microsoft said. Hastings, 51, said he wanted to focus on Netflixand his education work.

(Reporting By Bill Rigby; Editing by M.D. Golan)

((bill.rigby@thomsonreuters.com)(+1 206 418 9236)(ReutersMessaging: bill.rigby.reuters.com@reuters.net))