I wonder if, when the history is written, people will point to the moment that Ballmer declared that the iPhone would be an abysmal failure as a major inflection point.
I think part of Microsoft's problem is that, they are really kind of the General Electric of computing, but they still want to have flashy/startup-like initiatives in many respects.
I remember my father's take on their guys in the 90s; he worked for one of the major Canadian banks as VP of net architecture. IBM was the one always joined at the hip to the banks and MS was trying to get in there. They were always described as pushy. Anyways I remember hearing a story once about one of the bank guys cracking wise over the Xbox. Something to the effect of, "so what are you guys, really? I mean what are you trying to do? You have this desktop OS, this productivity suite that you badly support, you have this Enterprise stuff you want to sell us, and you also sell this game-box toy? You think IBM is distracted like that?"
I'm really paraphrasing here and it was ages ago, but that was the gist of it. It's like they never got over the Windows 95 launch/Rolling Stone moment, and always have tried to get it back.
If I were the emBallmer I would march into that ridiculous R&D lab where they've money-locked some of the brightest minds on the planet, ostensibly to keep them from enemy hands, and ask them for a skunkworks project to redefine the home PC using Surface and Kinect, and a prototype in 9 months. But that sounds like something Steve Jobs would do so I can hardly see it. They either need to really do something new and fulfill their fantasy or diminish and recede into the West and remain Microsoft.