Bing’s improved performance was coming at the expense of Yahoo, its erstwhile partner. Microsoft was eating its own.

When Apple introduced the iPhone, Steve Ballmer laughed. “No chance that the iPhone is going to get any significant market share,” he said in 2007, adding that same year, “iPod is a hot brand—not Apple.”

He pooh-poohed the iPad when it came out, in 2010, and it has been busting down the barn doors ever since, selling more than 55 million units. As for Google, Ballmer’s predictions were equally off base—according to court records, in 2005 he proclaimed, “Google’s not a real company. It’s a house of cards.”

Plenty of people can make predictions that prove boneheaded. But Ballmer’s bad calls have been particularly damaging for him inside Microsoft. Until his dying days, Steve Jobs could not only predict the direction the marketplace would be heading, but help drive it there. Google continues to pop out feature after feature and is now shooting directly at Microsoft’s main business lines: Google Docs is a free Web program competing with Microsoft Office. Google Chrome OS is a free operating system targeted at Windows.

With the competitors showing that kind of success—and winning so many accolades—Ballmer’s confidently proclaimed errors have been hugely embarrassing for Microsoft’s technical specialists, fueling muttered complaints that their C.E.O., a man with little technological background, was undermining them within the techie community.

“Steve has a knack for putting his foot in his mouth and being made to look incredibly foolish, and that just always grated on people at Microsoft,” said a former program manager who left the company last year to work at Google. “When he makes these predictions that are so horribly wrong, and you know it at the time, it is hard to forgive that, because it means he is hopelessly out of touch with reality or not listening to the tech staff around him.”

Ballmer’s key business philosophy for Microsoft was so antiquated as to be irrelevant. The Microsoft C.E.O. used to proclaim that it would not be first to be cool, but would be first to profit—in other words, it would be the first to make money by selling its own version of new technologies. But that depended on one fact: Microsoft could buy its way into the lead, because it always had so much more cash on hand than any of its competitors.

No more. The advantage that Ballmer relied on for so long is now nonexistent. Google has almost the same amount of cash on its books as Microsoft—$50 billion to Microsoft’s $58 billion. Apple, on the other hand, started the year with about $100 billion. Using superior financial muscle to take over a market won’t work for Microsoft or Ballmer anymore.

But, strangely, Ballmer may be invaluable for the company’s future. Because the time may be coming when the sprawling Microsoft empire will have to be busted up, like any other company that has spread itself too thin into too many product lines. And a deal-maker like Ballmer is just the type to lead that kind of massive corporate reorganization.

Ballmer has said he plans to stay in the saddle until 2018, but whether he and the rest of Microsoft’s management want it or not, change will almost certainly come as Wall Street tires of the company’s unfulfilled promises. Already there are rumblings that the time for him to go could be in the offing.

In Walter Isaacson’s authorized biography Steve Jobs, Jobs acknowledged Ballmer’s role in Microsoft’s problems: “The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company.… [Then] the product guys don’t matter so much, and a lot of them just turn off. It happened at Apple when [John] Sculley came in, which was my fault, and it happened when Ballmer took over at Microsoft. Apple was lucky and it rebounded, but I don’t think anything will change at Microsoft as long as Ballmer is running it.”

Most interesting, however, is that Jobs put the ultimate blame on Bill Gates: “They were never as ambitious product-wise as they should have been. Bill likes to portray himself as a man of the product, but he’s really not. He’s a businessperson. Winning business was more important than making great products. Microsoft never had the humanities and liberal arts in its DNA.”