I've personally long maintained that a major source of Microsoft's problems are a classic case of being on the wrong side of disruptive innovation. See The Innovator's Dilemma and the (IMO better) follow-up The Innovator's Solution for more.
Another has been the legal problems that have caused them to shy away from their past ultra-aggressive tactics.
If I'm right that outside problems are a major cause of their downfall, then part of Bill Gates' genius was recognizing the writing on the wall and leaving at the right time to maintain the myth.
In all likelihood it's a little bit of both external and internal factors.
I disagree with the article that seems to want Ballmer's head on a platter for bungling Vista - that was a bad move for sure, but tossing out everyone responsible for that mess seems like tossing out all opportunities to learn from it.
Hubris has a lot to do with it, I think. There have been a remarkably large number of instances where Ballmer has said something that betrays the fact that he has no respect for his competition. Everyone's a lame duck competitor compared to the wonderful products of Microsoft... until they completely trounce MS in the marketplace. Then you might hear a half-hearted mea culpa from Ballmer, but after that it's swept under the rug.
Maybe it's the job of a corporate CEO to talk big about his own products - but I've seen few other CEOs so openly negative and dismissive of competitors' products, and IMHO this has probably a significant hand in MS's failures at tackling new product lines. His reaction to more-successful competitors seems to be unproductive: note his claims that Google and iPods are not allowed in his house. How can you compete when you are willfully ignorant of your competitors' products?! When someone is leading a market I'm trying to compete for, you bet your ass I'll have my hands all over their product.