Will Lenovo's Yoga Pro 3 Kill Microsoft's Surface Pro 3?

Lenovo (LNVGY -2.27%), which recently claimed 20% of the global PC market, recently unveiled the Yoga Pro 3, a premium "laplet" (tablet/notebook hybrid) squarely aimed at taking down Microsoft's (MSFT 0.63%) Surface Pro 3.

Lenovo's Yoga Pro 3. Source: Lenovo

The Yoga Pro 3 is equipped with Intel's (INTC -0.26%) fanless Core M processor, a 3,200 x 1,800 QHD display which flips back 360 degrees, and lasts nine hours on a single charge. Depending on the configuration, the device will cost between $1,350 to $1,550 when it arrives in late October, undercutting Microsoft's comparable Surface Pro 3 models by several hundred dollars. Considering how popular Lenovo's previous Yoga models have been, could this game-changing laplet finish off the struggling Surface Pro 3?

The business of laplets
Windows laptop markers launched laplets, which flooded the market in 2012, to address the rising demand for tablets. Some companies introduced laptops with removable screens which turned into tablets, which others added slide-out keyboards and rotating screens. Microsoft's approach was to turn the keyboard -- which added the most weight to the device -- into a detachable magnetic cover for the Surface tablet.

Lenovo's design for the Yoga series, which debuted in late 2012, was much simpler by comparison. The Yoga's screen could be folded back halfway and propped up in a "tent" mode, or all the way to become a tablet. That low-cost design -- which only required a modification of the hinge -- caught on, and imitators like Asus' Transformer Book Flip and Toshiba's Satellite Radius soon followed.

In August, NPD Group reported that Lenovo's Yoga devices had become the best-selling convertible PCs in terms of unit sales and revenue in the U.S.

While Microsoft should be worried about Lenovo
Lenovo's Yoga devices cost between $569 to $1,549. By comparison, Microsoft's Surface devices cost between $449 and $1,949. To understand how badly Lenovo could hurt Microsoft, we should first compare the top-tier configurations of the Yoga Pro 3 and the Surface Pro 3.

Source: Company and industry websites

Considering that the top-tier Surface Pro 3 would cost well over $2,000 with the Touch Cover ($120) or Type Cover ($130) included, customers in the market for a premium laplet will more likely buy the Yoga Pro 3 for $500 less.

This could disrupt Microsoft's plans to win over enterprise users with its docking stations ($200), which convert the Surface into a full desktop with ethernet and multi-monitor support. Microsoft is currently selling a bundle which includes the Surface Pro 3, a Type Cover, and the docking station for $150 off the combined list price. The Yoga Pro 2 also lacks ethernet and multimonitor support, but that can be addressed via external USB adapters.

Microsoft's Surface Pro 3 in a docking station. Source: Microsoft

The death of the Surface could be a blessing in disguise
Lenovo's dominance of the convertibles market, while bad for Surface sales, would indirectly help Microsoft by helping it gain software market share. The Yoga Pro 3 runs on Windows 8.1, which will be upgraded to Windows 10 next year (possibly for free).

Therefore, there's no reason for Microsoft to keep supporting the Surface, which has incurred losses topping $1.7 billion since October 2012. The Surface, like the Xbox One and Windows Phones, weigh down Microsoft's bottom line because hardware is a much lower margin business than software.

Google (GOOG 0.03%) (GOOGL -0.04%) learned that the hard way with Motorola Mobility, which it bought for $12.5 billion but sold for $2.9 billion to Lenovo. That's why it now relies on hardware partners -- like LG, Asus, Samsung, and HTC -- to release its Nexus-branded products instead.

That's exactly what Microsoft should do today. Rather than gun for Apple's tiny 6% share of the PC market while competing against its Wintel allies, it should simply kill off the Surface and let popular allies like Lenovo pump out the hardware while focusing on its "One Windows" strategy for Windows 10. If Microsoft still feels attached to the Surface brand and form factor, it should just do what Google did with the Nexus and license it out to hardware partners instead.

The Foolish takeaway
Microsoft investors should actually hope that Lenovo's Yoga Pro 3 kills the Surface Pro 3. Unlike the video game or smartphone industries, where Microsoft needs to maintain a hardware presence to remain relevant, companies like Lenovo, HP, Dell, and Acer can spread Windows across PCs, laptops, and convertible devices by themselves.