June 27 (Bloomberg) -- Microsoft Corp.'s biggest ``screw- ups'' happen when the software maker fails to predict changes in the technology industry, such as the growth of Internet advertising, Bill Gates said today.

``In software, you've got to anticipate the turns in the road,'' Gates said. ``We missed the search and advertising thing -- the way that's grown up to be so important.''

Gates steps down today from his day-to-day role at Microsoft, the company he co-founded in 1975 and turned into the world's biggest software maker. Chief Executive Officer Steve Ballmer now faces the challenge of catching up with Google Inc. in online advertising, a market that research firm IDC says will reach $65.2 billion worldwide this year.

At a meeting with about 800 employees today, Gates and Ballmer reflected on the day they met and their careers at Redmond, Washington-based Microsoft.

The pair were introduced through a mutual friend at Harvard College and went to see a double feature of ``Singing in the Rain'' and ``A Clockwork Orange,'' Ballmer said. Ballmer presented Gates with a scrapbook for his retirement today and both men teared up.

After starting Microsoft, Gates persuaded Ballmer to drop out of business school at Stanford University. The two haggled over whether Ballmer would be paid $40,000 or $50,000.

``We split the difference,'' Ballmer said. As of September last year, he owned stock valued at $11.6 billion.

Dumpster Diving

Marc McDonald, who joined Microsoft as its first employee, recalled going dumpster diving with Gates for computer manuals while they learned to write software at high school.

McDonald, who started at a wage of $8.50 an hour, left the company in 1984 and returned 17 years later when Microsoft bought the business he was working at.

``It was big when I left. It was ridiculous when I came back,'' he said in an interview after the meeting today.

Other early employees described how Gates wouldn't tolerate people being unprepared for meetings.

``Bill can very easily raise his voice,'' said Vic Heller, who started at Microsoft in 1982.

Microsoft fell 12 cents to $27.63 today in Nasdaq Stock Market trading. The shares have dropped 22 percent this year.

Investors will judge Ballmer's future performance on the growth of Microsoft's online-services business, said Heather Bellini, an analyst at UBS AG in New York.

Yahoo Bid

In May, Microsoft offered to buy Yahoo! Inc., the No. 2 search engine, for $47.5 billion, a deal that fell through because the two companies couldn't agree on the price.

Gates will remain chairman, coming in one day a week to work on projects with Craig Mundie and Ray Ozzie, who inherit his software strategy responsibilities.

Ballmer said he almost quit soon after joining Microsoft because his parents didn't want him to drop out of Stanford.

Gates responded: ``You don't get it. You don't get it. You don't get it. We're going to put a computer on every desk, in every home,'' Ballmer said.

``Why did I come? I came because I believed in Bill. Why did I stay -- because I almost left -- I stayed because of the vision Bill painted,'' he said.

To contact the reporter on this story: Amy Thomson in Seattle at athomson6@bloomberg.net

Last Updated: June 27, 2008 17:27 EDT