Microsoft (NASDAQ:MSFT) on Monday showed off two new smartphones in its Lumia line at the Mobile World Congress In Barcelona, delivering a duo of budget-conscious, feature-rich handsets designed to help the company compete globally.

The Lumia 640 and Lumia 640 XL both offer a free year of the Office 365, a $69.99 value the company has increasingly been bundling with its lower-end devices to sweeten the offer (and build a user base that will ultimately pay).

"The Lumia 640 and Lumia 640 XL build on our success in the affordable phone space, with a few exciting additions," wrote Stephen Elop, executive vice president of the Microsoft devices group, on the Lumia Conversations blog. Elop introduced the phones at the Mobile World Congress, along with some other new products and initiatives.

The Lumia 640 Source: Microsoft.

What are the new phones?
The 640 and 640 XL essentially are replacements for the popular-by-Microsoft standards Lumia 630 and its physically bigger brother, the Lumia 1320. The XL moniker is an attempt to replace the previous numbering system that was a tad confusing.

Elop laid out some of the features for each phone in his post (and during his MWC speech). He raved about the 640's "8-megapixel camera including a front-facing camera designed for Skype," as well as its "long-lasting battery and fast LTE connectivity."

The 640 XL, he explained, "is our super-sized version." At 5.7 inches, it has a larger screen, a bigger battery, a 13-megapixel camera, and Carl Zeiss optics.

While the camera specs for both are similar to what a high-end phone would have included just a couple years ago, the processors and other specifications are in line with these being lower-end devices. The 640 has a 1.2GHz Qualcomm 400 quad-core processor with a skimpy 8 GB of storage, while the 640 XL offers the bigger screen and better camera, but the same processor and memory.

Both, at a quick glance, look like decent phones made more attractive by the inclusion of Office and Microsoft's promise of a free Windows 10 upgrade.

It's all about price
The specs for the 640 and 640 XL aren't quite as important as their prices: €139 ($156.05) for the 3G/Dual SIM 640, and €159 ($178.50) and €189 ($212.18) for the 640 XL 3G/Dual SIM versions before taxes and subsidies. The LTE model of the XL will set you back €219 ($245.86).

Microsoft is banking on the idea that phone technology has improved so greatly over the last few years that much of the world will accept lower specs as long as they comes with a much lower price. With the 640 landing at under one-third the cost ($649.99) of the lowest-tier, nonsubsidized, iPhone 6, the Windows maker has delivered on price. It also appears to offer an attractive set of features, making the 640 and 640 XL value plays.

"We're finding a lot of success," said Elop at MWC, The New York Times reported. "Our Q2 results, in terms of the number of actual phones sold, was the largest quarter ever in the history of the Lumia line. And most of those sales were in the lower price tiers, those people who are buying not only in an AT&T or Verizon store but Wal-Mart or Target."

That's likely to be enticing in developing nations, and it might also appeal to budget-conscious Americans.

The 640 and 640 XL will be sold globally. Elop made a point of saying the phones were not just for developing markets or people looking for low-cost phones, but also for business.

"With the affordable pricing of these devices, you can get three of the Lumia 640 or 640 XL family of products for the price of just one competitive flagship device with parity business features," Elop said at MWC.

No new flagship
While Microsoft has actively been pumping out mid and low-priced phones, it has steered clear of the top of the market dominated by Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF). That has left the company without a true flagship phone, a niche the 640 and 640 XL certainly leave open.

That's intentional, according to Microsoft's director of phone marketing, Neil Broadley, who explained to The Verge why the company is waiting to deliver a new top-tier handset.

"We remain completely committed and focused on new flagship products," Broadley said. "That said, certainly we believe the best time to bring those flagship devices to market is when we have our very latest flagship software experience available. "We're focusing our flagship development for slightly later when Windows 10 is available."

Elop echoed those comments during his Mobile World Congress speech, saying the launch of Windows 10 would come with phones in the "flagship category."

Microsoft has a "better than Android strategy"
Not having a true flagship has been an intentional strategy to pursue market share that has been gobbled up by low-cost Android phones. Android's huge share, as seen on the chart below, includes high-end phones running the OS, but much of it comes from cheaper "good enough" devices.

Source: Statista

Microsoft has smartly decided that going after the high end, where customer loyalty is high, would be a losing strategy. Instead, the company is targeting the parts of the global market where any smartphone is a huge step up, up along with people in the developed world looking for lower-cost, nonsubsidized options.

The company is betting that a low-end or midtier Windows 10 phone offers a better experience than an Android device at a similar price. If that's true and the company can bring in entry-level users -- maybe people buying their first smartphone in select parts of the world -- Microsoft can add to its user base and perhaps eventually bring people to fancier devices.

More importantly, the company can grow the audience for Office and its universal apps store. This will lead to an increased market for its PC-based software business.