Microsoft Is Selling More Lumia Phones and Making a Long-Term Play for Smartphone Leadership

Since acquiring Nokia's smartphone business,Microsoft has steadily expanded the Lumia line with midlevel and lower-end handsets.

The company has released a number of inexpensive smartphones that offer a surprisingly high level of functionality, but has avoided producing a high-end flagship device. In the year since the acquisition was completed, Microsoft has steadily pushed Windows Phone as a low-cost solution for users in the United States and as an affordable option in the developing world.

Microsoft has not increased its market share -- in fact, it actually dropped on a percentage basis in 2014 from 2013, according to Gartner--but the company is selling more phones.

Worldwide smartphone sales to end users by operating system in 2014 (thousands of units)

Source: Gartner,March 2015.

Microsoft reported selling 8.6 million Lumia phones during its most recent quarter, an 18% increase from the same period a year ago. This is notApple moving more than 60 million iPhones in a quarter, but it's an improvement and it has become clear the Windows maker has a plan.

It's on purposeWhile some of the Windows faithful have called for Microsoft to compete with Apple's iPhone andSamsung's Galaxy line with its own flagship phone, the company has rightly avoided that path. Given the perception (and in some cases reality) that Windows Phone lacks apps, competing at the top of the market seems like a clear recipe for failure.

Instead, Microsoft has focused on users who either by choice or necessity want a good-enough phone at a decent price. Those customers are more likely to put up with missing features, less than spectacular specs, and limited apps.

By targeting these consumers, Microsoft can increase the customer base that is comfortable and familiar with Windows Phone. As that audience grows, the company can monetize its members by selling apps and other content through its store and perhaps by eventually launching a premium, flagship phone.

Microsoft wasn't going to succeed if it went after Apple and Samsung customers. Instead, it marketed to everyone else -- the people who can't afford or don't want to pay for top-of-the-line phones. It's a smart strategy that Microsoft has executed well by delivering some very good phones for sub-$200, even sub-$100, prices.

Microsoft's Lumia 635 can be purchased for under $100 on Amazon. Source: Microsoft

It's a long-term playMicrosoft has enough cash that it can afford to lose money on its phones while it builds the division. That should accelerate when it launches Windows 10 this summer. The new OS is the same whether it's operating on a computer, a tablet, or a phone. That means there will be a single app store for all devices, which should solve the apps deficiency that has plagued the company while it has attempted to eke out a foothold in smartphones.

The launch of Windows 10 should get more people to at least consider Windows Phone and the value-minded lineup of Lumia devices. That will probably give the division a bit of a jolt, but it's only an enhancement to the strategy, which has been to bring those unwilling or unable to spend $600 or more on a smartphone into the Windows Phone family.

Microsoft has shown restraint here and worked to build a base rather than trying to deliver an improbable knockout blow to Apple or Samsung.Countless Android phone makers have tried to do that, includingSony, which keeps releasing new phones in its Xperia line to disappointing sales results.

It might not be sexy or profitable in the short term to court the low end of the market (the Lumia unit posted a $4 million loss in the most recent quarter), but it's sensible. Microsoft has targeted customers who might actually want its phone and become long-term fans. That could ultimately turn Lumia and Windows Phone into a profitable business unit.

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Daniel Kline owns shares of Apple and Microsoft. He owns a Lumia 635 for no particular reason as it oes not have a service plan. The Motley Fool recommends and Apple. The Motley Fool owns shares of and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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