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Surface Pro 3: How Microsoft wants to kill off the PC

By positioning the new Surface as a replacement, Microsoft hopes to finally break into the tablet market.

Microsoft Vice President Panos Panay holds up a Surface Pro 3. Sarah Tew/CNET

With the Surface Pro 3 tablet, Microsoft is trying to do the previously unthinkable: kill the PC.

It's the first time the company has explicitly made this point, a tacit admission that it can no longer get by on the slowing PC business.

"I am sure that this is the tablet that can replace the laptop," Panos Panay, the Microsoft vice president in charge of the Surface line, said at the New York press event Tuesday.

Microsoft has a lot riding on the Surface Pro 3 and views its larger display, full Windows 8 operating system, and keyboard accessories as its way of breaking into the tablet market, an area where the company remains largely irrelevant. But instead of going after consumers eager to snap up an iPad or Android tablet, it's targeting big businesses and power users.

"I think it's a pretty important investment for them," said Forrester Research analyst J. P. Gownder.

The Redmond, Wash., company also views the Surface tablet family as a showcase for its software, potentially inspiring other manufacturers to create their own Windows tablets worthy enough to replace a PC. CEO Satya Nadella said Microsoft isn't building hardware for hardware's sake, nor is it trying to take business away from its partners.

"We are not competing with our OEMs (original equipment manufacturer) in hardware," Nadella said at Tuesday's event. "In fact, our goal is to create new categories and spark additional demand across the entire ecosystem."

The dilemma has been the lack of interest in Surface, which can be traced back to the fumbled launch of the brand. When Microsoft first unveiled the Surface in June 2012, it talked up two versions of the tablet, a full Windows 8 version and another running Windows RT, a stripped down version of the operating system unable to handle traditional Windows-based software. The pitch was the same: these were tablets that fit in at home just as well as they did at the office.

Neither did well, but RT sales were especially poor, and Microsoft wrote off $900 million for its Surface RT units and accessories last year. In fact, Microsoft has had to lower its prices and offer huge discounts to offload the tablets. For Black Friday, the company cut the price of the Surface RT to $199 (down from $499), making it the top selling tablet at Best Buy.

"The road to the Surface line, particularly the RT side of things, has been a very big loss for them," Gownder said.

That might help explain why Microsoft didn't unveil the Surface Mini, a smaller, more affordable tablet (likely running Windows RT) that was widely expected to make its debut Tuesday.

When asked about the lack of an RT product at the event, a Microsoft spokesman replied, "We're working on a variety of devices -- and we announce new products when the time is right. Yesterday's announcement was about answering the question, can a tablet replace your laptop? Our answer is yes, Surface Pro 3 is the tablet that can replace your laptop."

The spokesman also reaffirmed Microsoft's commitment to the RT operating system, which is powered by ARM chips, the lower-power processors more commonly used in smartphones and tablets.

"Windows on ARM continues to be an important element of the Windows strategy," he said.

The Surface Pro 3 Sarah Tew/CNET

The Surface setbacks have meant minimal presence in the tablet business. Its operating system ran on 2.1 percent of the tablets shipped last year, up from 1 percent in 2012, according to research firm Gartner. The limited success is due less to the Surface and more to Microsoft's partners. Companies such as Asus and Lenovo are in the top five slots for tablet vendors. Both make Android tablets as well as non-Surface tablets that use Windows. Lenovo's Windows tablets, which include devices like the Thinkpad line, do particularly well, according to Gartner research. Microsoft, on the other hand, didn't make it to the top five with Surface.

Still, the company has made some progress. In the fiscal third quarter, revenue from its Surface business rose 50 percent from a year ago to $500 million. In comparison, Apple generated $7.6 billion in sales from its iPad in the last fiscal quarter -- and that was considered a disappointment.

While Microsoft has always teased the idea of the Surface entering the workplace, the company is now going all in on the idea that the gadget can be your primary work device.

Gownder thinks the Surface Pro 3 could do well in the enterprise market. Microsoft promised a tablet that would be thinner and lighter than a MacBook Air, and it comes with OneNote integration and a multipurpose stylus pen. Though these seem like incremental improvements -- the Surface Pro 2 was a bit thicker and heavier -- Gownder said the new features could make all the difference for workers who are on the go.

Gartner analyst Steve Kleynhans agreed and called the pro a "pretty impressive step forward" that could change the way the industry thinks about what a laptop should be like.

"Will this kill the laptop? No, but it will change the laptop," Kleynhans said. "Other manufacturers will have to look at this device and decide how to respond -- ignoring it is not an option."

Ultimately, sales aren't the only measure of success for the Surface Pro 3, Kleynhans said. The device could drive interest in Windows 8, or further spark the notion that a tablet with a keyboard attachment could replace a PC.

"Having a sales success with Surface Pro 3 is probably more important as a proof point and to establish relevance for Microsoft in the device space, than it is from a financial perspective," he said. "If it 'fails,' I don't think Microsoft is ready to throw in the towel yet but will continue to chip away for a few more iterations."