At a Microsoft Financial Analyst meeting yesterday, Microsoft CEO Steve Ballmer demonstrated, yet again, that he still doesn’t get, or perhaps is unwilling to admit, why people are ditching PC’s and flocking to the Mac in droves.

While looking out into a sea of reporters and analysts, Ballmer noticed the number of computers sporting an illuminating Apple logo on the back and had to comment.

We have low share, by the way, in the investor audience. I can see the Apple logos versus the PC logos. So we have more work to do, more work to do. Our share is lower in this audience than the average audience. But don’t hide it. I’ve already counted them. I have been doing that since we started talking. (Laughter.) … But anyway, that’s OK. Feel free as long as you’re using Office to go right on ahead.

Well you certainly can’t fault him for not having a sense of humor.

But as Ballmer went on, his words slowly revealed a lack of appreciation for why Apple has been so successful and why Microsoft’s earnings are on a significant decline.

We do not, say, like Apple, believe in low volume, very high prices, very—Apple is a great company, does a fine job. But their model says high margin, high quality, high price. That’s kind of how they come to market. We say we want big market share. But with big market share, you take a lower price.

Ballmer and Microsoft’s focus on market share is so intense as to border on utter foolishness. What is the purpose of market share if you’re not making money? Obviously, Microsoft is still a cash cow with revenue in the billions of dollars, but in order to increase share price for shareholders, revenue must increase and chart upwards. Maintaining a 90+ percent market share with low margin products doesn’t accomplish that.

Also, did anyone else notice that Microsoft talks about Apple’s high margin, high quality, high price products like it was a bad thing? Microsoft wishes it had Apple’s margins but knows that comparably priced PC’s just wouldn’t sell. So they’ve seemingly convinced themselves that the battle is for market share, which I suppose would be fine if they were actually doing anything to improve on their market share position. But unfortunately for Microsoft, they’re losing that battle too (in both the PC and smartphone market). During the last quarter PC sales declined by approximately 4%. Apple, meanwhile, saw Mac growth come in at 4%.

But Ballmer was just getting started. Soon thereafter Ballmer explained Apple’s success in the market as being the result of it’s hardware.

And at least when Apple attacks us, the primary attack that comes from Apple is, hey, at the end of the day, we have the coolest hardware. When you see the hardware, the PC designs that will come out this Christmas with Windows 7, I think that conventional wisdom can begin to really change. There is some really amazing, amazing work. So it is possible to get great hardware innovation, even when hardware and software comes from separate companies.

Wow. Does anyone have the balls to tell the higher ups at Microsoft, since they can’t figure it out by themselves apparently, that the primary reason people buy Macs is for the software?

Apple undoubtedly has cool hardware, but you know what, so do a lot of other PC manufacturers. Not every PC may be up to snuff with Apple’s designs, but there are still good number of well-designed Sony Vaio and HP machines out there. But that’s just secondary. People don’t wander into Apple Stores, pick up a MacBook and say, “Wow, this build quality is great! I’ll take two!”. Rather, the hardware design and high build quality are just parts of an overall user experience that also includes the easy to use and extremely capable OS X. If it was all about the hardware, as Ballmer implies, then there wouldn’t be a large number of consumers putting copies of OS X onto cheap and poorly built netbooks.

I don’t know if Microsoft is dumb or purposefully ignorant, but as a software maker, it’s taken the arrogant position that their software is on par with Apple and that the hardware makers Microsoft relies on are the ones to blame for shrinking PC sales. How convenient. Or as Tim Robbins character from The Shawshank Redemption, Andy Dufresne, might say, “Since I’m forced to use Windows OS at work, I find it decidedly inconvenient that Microsoft won’t accept responsibility for its shoddy OS.”

Microsoft’s woeful ignorance of its own OS is also plainly apparent in its “Laptop Hunter” ads where shoppers are making a strict price to price comparison. Mac users know that Apple products are more expensive. It’s been that way for as long as I can remember and it’s hardly a secret. Price isn’t why consumers purchase Macs, so why would Microsoft waste time advertising how cheap its PC’s are? Well, because in Microsoft’s mind, Windows is just as good, if not better, than OS X.

And therein lies the problem. Microsoft lives in a world where high market share = high quality, and that’s probably a lie they’ve been telling themselves since the early 90’s, and that helps explain Ballmers obsession with market share. It’s a lot easier to announce and believe that you have a superior product if you have a high market share than it is to, oh I don’t know, actually put out a superior product.

For far too long now, Microsoft has been happy with the status quo and its insanely high market share, but they’ve done absolutely nothing to warrant keeping that market share. And now that Mac sales are increasing at the expense of PC’s, MIcrosoft is in panic mode and quite frankly has no idea how to respond.