Microsoft's budget Lumia 640, 640 XL phones come with free Office 365

BARCELONA -- Microsoft is quietly building a lineup of affordable smartphones it hopes will get penny-pinchers to take a second look in its direction.

After introducing a pair of 3G Lumia handsets targeting the emerging markets in January, Microsoft is back with the Lumia 640 and 640 XL, another pair of smartphones packed with higher quality components and bearing prices designed to attract budget-conscious customers in both emerging and Western markets. The extra cherry on top: both smartphones come bundled with a one-year subscription to Microsoft's Office 365.

The Lumia 640 starts at $159/AU$299 (roughly £100) without a contract, while the LTE version of the phone costs $20 more. The larger Lumia 640 XL costs $209 (roughly £135), and $239/AU$399 with LTE. In comparison, an iPhone 6 without a contract starts at $649, £539 or AU$869.

"The new Lumia 640 and 640 XL smartphones - especially the LTE versions - will offer a great user experience at an affordable price," Forrester analyst Thomas Husson said. "But it remains to be seen if they are able to impress consumers in the competitive markets of China, India, and other emerging mobile markets."

The world's largest software company is betting that a market made up of first-time smartphone buyers, consumers in emerging markets and cost-conscious shoppers is enough to build a foundation of users for its Windows Phone mobile operating system. With most of the industry heavy hitters going after the market for premium customers, Microsoft sees an opportunity to introduce higher quality smartphones at an affordable price.

"The sweet spot is at the high end of the prepaid market or low end of the contract segment," Ifi Majid, director of the phone marketing team at Microsoft, said in an interview.

It's not a novel concept. China's Xiaomi, the world's most valuable startup, has exploded by employing the same concept on its Android smartphones and tablets -- many of which bear a resemblance to some of Apple's products. Unlike Microsoft, Xiaomi doesn't sell its mobile devices in the US.

Other Chinese vendors, such as Huawei and ZTE, have also stepped up the kind of quality features and components it jams into its smartphones, which have the same general price range of the Lumia 640 and 640 XL.

And while some buyers have purchased its more affordable Lumia smartphones, the market position of the Windows Phone platform slid back last year. In 2014, it held 2.7 percent of the market for smartphone operating systems, down from 3.3 percent a year ago, according to market researcher IDC. In comparison, Android solidified its lead by growing its share to 81.5 percent.

Microsoft hopes that its integration of Windows services, features like the Cortana voice assistant and the one-year subscription to Office 365, which includes Microsoft Word, Powerpoint and Excel, valued at $69, will give it an edge. The free one-year software bundle, which allows a user to access files from a single PC or Mac, tablet and smartphone, falls in line with CEO Satya Nadella's push to transform the company into a services business.

The target is the "pragmatic user," either in business or looking to save some money while getting access to Office programs, Majid said.

The Lumia 640 represents an upgrade over the Lumia 635, which was Microsoft's previous low-end LTE-capable smartphone. The Lumia 640 has a 5-inch HD display, an 8-megapixel rear camera with LED flash and a 1-megapixel front-facing camera. It also has the option for dual-SIM card slots, a popular feature in markets like India, where customers can bounce between different carriers.

The higher end Lumia 640 XL has a 5.7-inch display, a 13-megapixel camera with Zeiss optics and a 5-megapixel wide-angle front-facing camera. It also has a bigger 3,000 mAh battery to support the larger 720-pixel HD display.

One of the key problems with the Windows Phone platform has been the lack of key apps found on Android and on Apple's iOS software, which powers the iPhone and iPad. Windows Phone has 560,000 apps, and the company is still working on getting the right ones, Majid said. Android has more than 1 million apps in its Google Play store.

The move to Windows 10, which offers developers the ability to create universal apps that run across smartphone and PC platforms, will help generate interest, he added. In the meantime, the company is looking at adding more popular apps, with a focus on nabbing local apps in specific regions.

Microsoft will start touting some of the specific apps on its platform, and will get partners to make sure that they clearly state that they run on Windows Phone, Majid added.

While Microsoft continues to press into the affordable smartphone category, it isn't ceding the flagship smartphone market. Majid said that the next premium smartphone would launch at the same time as Windows 10 but didn't give a specific date (Microsoft hasn't said when Windows 10 will officially launch either).

Majid doesn't believe consumers should hold off on buying a phone until Windows 10, because devices that are available now will be able to upgrade to the new operating system.

"If you buy your phone now, it gets even better later," he said.