Microsoft's Shifting Strategy in Response to Apple

AllthingsD republishes a memo from Microsoft CEO Steve Ballmer to all Microsoft employees detailing an update in their corporate strategy. Ballmer specifically mentions Apple and their recent success:

Apple: In the competition between PCs and Macs, we outsell Apple 30-to-1. But there is no doubt that Apple is thriving. Why? Because they are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience. Today, we’re changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises. We’ll do the same with phones—providing choice as we work to create great end-to-end experiences.
Ballmer details how Apple has found success in an "end-to-end" model by providing the customer with a full experience by designing both hardware and software. Walt Mossberg had previously articulated this basic difference in strategy between the two companies.

For many years, there have been two models of how to make computers and other digital devices. One is the component model, championed by Microsoft. The other is the end-to-end model, championed by Apple.
Microsoft, of course, saw huge success in the component model in the personal computer market by supplying Windows to thousands of competing hardware developers. Microsoft has tried to apply this same strategy to music players and mobile phones, but now acknowledges this had come with some user experience compromises. Some of this shift in strategy has already been seen in their Xbox 360 and Zune products where Microsoft is the sole vendor.

Ballmer, however, believes that Microsoft will be able to extend a "no compromises" end-to-end experience while retaining a commitment to choice. He specifically mentions phones as a target. In fact, Microsoft is already rumored to be working on a Zune phone to compete with the iPhone.