It’s official. Microsoft has indeed engineered a major shakeup of its entertainment and devices division, as reported earlier today (below).

Out are the two most visible faces of the division: president Robbie Bach—who has led the business unit since it’s inception in 2005 and is a 22-year veteran of the company—and J Allard, the chief experience officer and chief technology officer who spearheaded much of the successful Xbox 360 product launch and the less-than-successful Zune device and service.

Bach will retire this fall, while Allard—who currently on sabbatical—will remain as an informal advisor to Microsoft CEO Steve Ballmer. He’s been with Microsoft for 19 years.

Replacing them will be a pair of lower-level executives. Don Mattrick will lead the division’s videogame business and Andy Lees will lead the mobile business. Both will report directly to Ballmer, but their exact titles are not yet clear.

PRIOR REPORT:

On the heels of rumors that Xbox and Zune creator J Allard may be leaving Microsoft comes new speculation that the company is planning a far broader shakeup of its entertainment and devices division.

The Wall Street Journal reports that “bruising competition” from Apple and Google is forcing the company to reexamine the business unit that oversees its videogame, mobile phone and Zune strategy. Exactly what changes are expected, other than Allard’s likely departure, are unknown, but they could be announced as early as this week.

On paper, it seems as if the entertainment and devices division is doing fine, with $1.67 billion in revenues for the first three months of the year, more than 10% of Microsoft’s total revenues. But the majority of that comes from the success of the Xbox. The company has sold more than 40 million Xbox 360 consoles to date, with an average of eight games sold per unit, according to VentureBeat, making it a significant cash generator.

Dragging it down, however, are the unit’s mobile and Zune businesses. The Zune device has yet to break past a 1% market share in the MP3 player space, while Windows Mobile phones lag in smartphone market share (at 15% in the U.S., according to Gartner) and overall mobile phone market share (at 6.8% worldwide, according to Gartner).

Big changes are in store for both strategies. When Microsoft introduced the well-received Windows Phone 7 Series software this spring, Microsoft told Billboard that the new mobile phone software would drive its Zune strategy going forward. Outside the U.S., phones based on Windows Phone 7 Series will be the only Zune device available to buy. Microsoft said at the time it would continue selling both standalone Zune devices and Zune-enabled mobile phones in the U.S., but we’ll see whether that statement stands following the expected reorg.

As for leadership, while Allard gets much of the attention, the unit is led by Robbie Bach, who took the helm of the business unit since its inception during Microsoft’s last major reorganization back in September of 2005. Where he winds up after the pending changes is another key scenario to watch.