Gates, a Harvard University drop-out who co-founded Microsoft Corp. 33 years ago, will remain chairman of the Microsoft board and its largest shareholder but is stepping away from his workaday duties.
Gates will devote more time to the $29.1 billion Bill and Melinda Gates Foundation, the company said.
Gates, 50, who began Microsoft in 1975, recognized the value of software platforms as a product separate from computer hardware, The New York Times reported Friday.
He leaves Microsoft in a dominant position as a developer of software but at a time when the future of technology is betting heavily on Internet revenues, which Google dominates.
Google earns about 60 percent of the Internet market revenue, Yahoo! Inc. about 20 percent and Microsoft less than 10 percent, the Times reported.
"The threat to any technology company is to miss one of the big shifts in technology and Microsoft missed the transition," David Yoffie, a professor at the Harvard business school, told the Times.