Microsoft is replacing the executive in charge of its critical Windows Phone business, which has struggled to gain market share after a big update and partnership with Nokia this fall.

But in a memo to employees today, Chief Executive Steve Ballmer didn't characterize the move as a demotion for Andy Lees, the former server team executive who has guided rebuild of Windows Phone and its first launches.

Ballmer said Lees (left) is moving to "a new role working for me on a time-critical opportunity focused on driving maximum impact in 2012 with Windows Phone and Windows 8. We have tremendous potential with Windows Phone and Windows 8, and this move sets us up to really deliver against that potential."

Perhaps Lees is going to help with the Windows app marketplace that will span the phone and PC businesses. Or maybe he's going to help finalize the strategy for Windows 8 on ARM mobile hardware.

Terry Myerson, the phone group's engineering vice president and veteran of the Exchange team, will take over leadership of the overall phone business.

Up next for Myerson (below) will be the U.S. launch of Nokia's Windows phones in early 2012. Presumably he'll also be helping carriers and handset makers prepare to release LTE models later in the year.

Meanwhile Microsoft's share of the smartphone business slipped over the past year, to 1.5 percent in the third quarter, down from 2.7 percent during the same period the year before, according to Gartner.

Here's Ballmer's memo:

To: All Microsoft Employees
From: Steve Ballmer
Subj: Leadership Next Steps - Windows Phone
Sent: Monday, December 12, 2011

We are driving toward the end of the year with a lot of momentum and buzz, especially in the consumer arena. The new Xbox dashboard is being well received, Kinect and Xbox consoles set a record for Black Friday weekend sales, the Windows Store news from last week delighted developers and partners, Windows Phone 7.5 continues to win reviews, and the Nokia Lumia series has grabbed a ton of attention in Europe, creating anticipation for availability in other geographies next year.

As I look at where we are, what we've done, and what we must do in the year ahead, I'm making two leadership changes to ensure we build on our momentum. First, I have asked Andy Lees to move to a new role working for me on a time-critical opportunity focused on driving maximum impact in 2012 with Windows Phone and Windows 8. We have tremendous potential with Windows Phone and Windows 8, and this move sets us up to really deliver against that potential.

Second, as Andy takes on these new challenges for the company, Terry Myerson will assume Andy's existing responsibilities for leading the Windows Phone Division. As many of you know, Terry played a key and highly successful role working with Andy by leading the engineering work on Windows Phone 7 and 7.5. Terry will now be responsible for Windows Phone development, marketing, and other business functions. Because Terry has been so integrally involved in our Windows Phone work already, I'm confident that he can make a seamless transition to this new and broader leadership responsibility.

Both these changes take place immediately.

I want to personally thank Andy for his contributions to the phone team. In the three years Andy has been leading the phone group, we've come a long way - we reset our strategy, built a strong team that delivered WP7 and WP7.5 and created critical new partnerships and ecosystem around Windows Phone. That is a ton of progress in a brief period of time, and I'm excited for Terry and team to keep driving forward and for Andy to dig into a new challenge.

It is amazing to pause and look back at what we've accomplished as a company this year, from our incredible product momentum to the formation of several powerful partnerships and the overall strength of our leadership team. And you know I'm a look-forward kind of person, so when I look forward to 2012, I see even more opportunity and potential in what we have planned.

Steve