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New Microsoft boss Satya Nadella is set to unveil the firm's latest attempt to take on the iPad next week - despite two previous models flopping.

Microsoft is expected to unveil the third generation of its Surface devices at an event on Tuesday, laying hints that it will also introduce a smaller tablet, to address the fast-selling lower end of the market dominated by Apple's iPad mini, Amazon's Kindle Fire, Google's Nexus and Samsung's Galaxy range.

Microsoft's Surface, launched in October 2012, has about 2 percent of the market and has not made a dent on Apple's iPad.

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Microsoft Surface: A new, smaller version of the tablet is set to be unveiled next week - Microsoft's third attempt at a hit device.

The new version is expected to include faster processors, and a new mini size.

Investors have so far reacted well to Nadella's 'mobile first, cloud first' strategy to recast the software maker as a 'devices and services' company, sending its shares up 9 percent since he took the helm.

So far he has stressed the services side of the business, making the momentous move to put Microsoft's Office suite on Apple Inc's iPad.

This was popular with Wall Street and more importantly with consumers, who performed 27 million downloads in a matter of weeks.

However, the firm is struggling with hardware, and has just 3 percent of the global market share in smartphones.

Given that tiny market, some investors believe Microsoft should not waste time and money on the low-margin hardware business.

ValueAct Capital, which led the shareholder revolt last year which culminated in previous CEO Steve Ballmer's retirement, has lobbied against Microsoft's hardware effort, including its costly acquisition of Nokia's handset business.

Microsoft Vice President Panos Panay, during a news conference to introduce the Microsoft Surface 2 in New York on September 23, 2013. It was touted as being a laptop alternative thanks to an innovative keyboard case

'Nadella is off to a golden start as CEO, although turning around the tablet and mobile business over the next 12 to 18 months remain his two key Herculean tasks,' said Daniel Ives, an analyst at FBR Capital Markets.

'If the turbulence gets too rough on the tablet and/or mobile segment, we can potentially see some strategic changes on the horizon around the hardware business.'

Despite unspectacular sales, there are signs that Microsoft's Surface Pro 2, which runs the full Windows operating system, is starting to attract Microsoft's core business customers.

'There's certainly tons of interest in the Surface Pro as an Ultrabook (lightweight laptop) replacement that has tablet capabilities,' said J.P. Gownder, an analyst at tech research firm Forrester.

Microsoft CEO Satya Nadella speaks at a Microsoft event in San Francisco, to launch Office for the iPad

'It is the No. 1 model I get asked about, it's going to have a lot of eyes on it.'

Even if the Surface never dominates the market, Gownder thinks Nadella and Microsoft are right to persevere with hardware, if only as a way of showing other device makers how best to make use of Windows.

'Microsoft would be nuts not to have devices in the mix.

'The danger is in not exploring,' said Gownder.

The Surface 'is an important product to basically show what their overall vision is for Windows, and also to offer businesses and consumers another choice.'

 

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