Microsoft Corp's Robbie Bach, head of the 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 is being brushed aside by Apple Inc's iPhone and Google Inc's Android operating system in a fast-growing, but increasingly crowded smartphone market.

It's maybe time for new leadership, said analyst Matt Rosoff of independent research firm Directions on Microsoft. They've really been struggling to get traction in mobile for some time.

Bach will retire this autumn at the age of 48, Microsoft said. He has led the entertainment and devices unit since its creation in 2005.

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.

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.

If Ballmer is getting pressure that they have not really succeeded overall in the division, and it's time to fix it, the easiest thing to do is change the leadership, said Wedbush Securities analyst Michael Pachter.

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.

MOBILE BATTLEGROUND

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.

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 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 and Andre Grenon)

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