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Microsoft Knows Where It Is Going, but Who Will Follow?

NEW YORK (TheStreet) -- Microsoft (MSFT) shares are up more than 10% since Satya Nadella became CEO in February, but as Microsoft released its new Surface 3 Wednesday one of our most prominent analysts insisted the company is "an embarrassment."

That may prove to be true, but at least Nadella's company knows where it's going. It is recarving for itself a niche among business buyers whose loyalty it once took for granted.

Its first earnings release under the Nadella regime gave it a little breathing room. 

Revenue fell slightly from the year before, and net income fell 6.5%, but the dividend of 28 cents was 5 cents higher than in the previous March. So as fashions among traders changed, from growth to yield, Microsoft was in a sweet spot.

But it's a trick the company may be hard-pressed to repeat, as Nokia's (NOK) device business hits Microsoft's books for the first time this quarter. Nokia's latest numbers look good, but that was because the networks business, which it's keeping, did well.

The devices business, by contrast, is a money pit. So, for that matter, is the Surface business, which has lost an estimated $2 billion so far while generating $2.64 billion in sales, one-third of what the Apple (AAPL) iPad does in a single quarter.

Yet Nadella made clear that he is not for turning with Wednesday's Surface 3 launch. Here is why.

The new tablet-PC hybrid has everything office workers have been demanding from devices. It's thin, light, with a big screen and a real keyboard. It costs $799, plus another $129 for the keyboard. The hope is it will break even, and eliminate the "conflict" that Microsoft sees between laptops and tablets. 

Its best feature may be a "connected standby" mode, which keeps the unit connected to incoming mail and other messages even while powered down. 

The hope is it will free Microsoft users from their current deep attachment to electric cords, as well as the need to wait for the machine to launch.

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