With new Lumia phones, Microsoft doubles down on emerging markets

Microsoft is focused on the long game when it comes to mobile.

The Redmond, Wash., company has aggressively gone after budget-conscious consumers in emerging markets with cheaper Windows Phone smartphones. The world's largest software maker is wagering consumers in places like India will depend on the included Microsoft services such as Office and, eventually, move up to flashier, more expensive Windows devices.

Microsoft on Wednesday introduced the Lumia 532 , which will retail for $93, or 79 euros, and the Lumia 435 , which will cost around $81, or 69 euros. UK and Australian prices were not announced, but the euro price converts to around £60 or AU$115 for the 532; and £55 or AU$100 for the 435. The two smartphones undercut its predecessor, the Lumia 520, which was already hailed as a budget smartphone.

While Apple and Samsung hammer each other for market supremacy with expensive phones, lower profile players and upstarts recognize the potential for growth by delivering affordable phones that are good enough. Microsoft, whose Windows Phone platform is a distant third place behind Google's Android and Apple's iOS, will take growth where it can find it. India looks especially promising as the "vast majority of the country's user base migrate to smartphones from feature phones," according to researcher IDC.

"Part of creating the awareness and visibility for Windows Phone and Lumia is simply getting in the hands of more people," Jo Harlow, vice president of the phone business unit at Microsoft, said in an interview last week. "The affordable segment gives us an opportunity to do that because it's so large."

Windows Phone could use the help. In the third quarter, it held just 3 percent of the market -- actually a tick lower than a year ago -- according to Gartner. In comparison, Android dominates the market with 83.1 percent of the market, with iOS holding a 12.7 percent slice.

Microsoft needs to "scale Windows Phone as a platform, but I'm worried that the side effect will be that they establish the platform at the low end at the expense of never developing a compelling high-end platform," said Jan Dawson, an analyst at Jackdaw Research.

Ultimately, the company hopes customers -- perhaps a year or two down the line -- will upgrade to a smartphone like the Lumia 435 or Lumia 532. While the Nokia name remains strong in regions such as Africa and India, Microsoft is working to create a single family that starts with the Nokia line and moves up to the Microsoft Lumia line, making it the logical next purchase for consumers.

Seeding the market

Microsoft set the tone for its mobile strategy last week with the first product announcement of the year. Rather than a Lumia smartphone, the company introduced the $29 Nokia 215 at the Consumer Electronics Show. Running on the basic Series 30 platform, the Nokia 215 offers just a handful of services from Microsoft, including Bing and MSN, as well as Facebook and Twitter.

Despite the price, the Nokia 215 is as important to Microsoft as any flagship product. The low cost could make it an ideal first phone, especially in markets such as India or Africa, where price sensitivity plays a big role.

Apple, Google and Microsoft don't have access to such customers, Harlow said. Now with the Nokia 215, the population can finally get their first taste of Microsoft services. The company plans to add more Microsoft-branded services to further reinforce the connection, she added.

Still, Microsoft faces a significant challenge from an army of regional and local players offering affordable Android phones. Motorola has won critical praise for its Moto G ($180 without a contract) and Moto E ($129). Chinese vendor Xiaomi has leapt into the big leagues with attractively priced smartphones, while ZTE and Huawei have shown they can go low. Google, which started its Android One program with a goal of creating sub-$100 smartphones, has enlisted regional vendors such as India's Micromax.

"The issue I see though is that the mid-range from Android is getting better," said Carolina Milanesi, an analyst at research firm Kantar Worldpanel.

Microsoft believes its budget phone experience is superior because the Lumia devices come with Microsoft services, and can be upgraded with the latest operating system -- something that doesn't always happen with Android. Windows Phone also offers tighter integration with apps such as Office Word and Excel, as well as its virtual personal assistant Cortana.

The opportunity for smartphone sales isn't just relegated to emerging markets. US consumers are increasingly looking to prepaid services, and are learning how much their smartphones cost when they don't sign a two-year contract.

Harlow said both new Lumia phones would sell in the US, but declined to comment on timing and availability.

Where's the flagship?

Microsoft has been relatively quiet when it comes to a marquee device. Its last true flagship product was the Lumia 1020, which impressed reviewers with its 41-megapixel camera when it launched in the summer of 2013. But despite such praise, it didn't sell well.

"Going after the high end is just too hard," Milanesi said.

But having a flagship smartphone is critical for any player. The Lumia 1020 raised the profile of its brand and demonstrated that it wasn't just Apple or Samsung that could pack innovative features in their products.

So has Microsoft given up on the high-end of the market?

Harlow dismissed the notion. "We are a portfolio company," she said, while declining to go into specifics. "We were one at Nokia, and we continue to be one at Microsoft."

Still, Microsoft could be in a holding pattern until its next-generation operating system, Windows 10, officially launches.

"They're waiting on Windows 10 to bring out another flagship, which means it'll still be many months until we see it, but it needs to be better than what they've put out so far," Dawson said.

Microsoft will provide details at an event on January 21.