Microsoft unveils budget smartphones but no flagship in sight

Microsoft has released two budget smartphones with free Office 365 in an effort to tempt users ahead of the launch of Windows 10, but a flagship phone for the software giant remains elusive.

The two devices - the 5-inch Lumia 640 and larger, 5.7-inch Lumia 640 XL – are further low-cost releases by Microsoft as it looks to boost its market share in a fiercely competitive smartphone environment.

Microsoft

The Lumia 640 costs around 159 euros ($178) and the 4G Lumia 640 Xl costs 219 euros, and both will be rolled out globally this month. The phones were unveiled at Mobile World Congress in Barcelona on Monday.

To attract users, Microsoft is offering its Office 365 suite, which includes Word, Excel, PowerPoint, Outlook and OneNote, free for a year.

"Microsoft understands it's in a weak position and is leveraging the wider capabilities to support its mobile offering," Ian Fogg, head of mobile at IHS, told CNBC by phone. But Fogg warned that the move risked "devaluing" Office.

Microsoft said both devices are upgradeable to Windows 10 - its latest operating system, unveiled earlier this year, which is expected to be rolled out across all of the company's devices.

Windows 10 marks a complete overhaul of Microsoft's heavily-criticized predecessor Windows 8, and analysts said a lot is riding on the success of the platform. The operating system will be released later this year, but the exact date is unknown.

It comes as Microsoft continues to struggle in the smartphone space - Windows phones had a market share of just 2.7 percent in 2014, according to IDC.

Analysts expect Microsoft to release a flagship phone when Windows 10 is launched, but Fogg said the company was playing a "risky" game by waiting.

"It signals that Microsoft seems determined to wait for the Windows 10 launch to launch new flagship hardware.That is a risky strategy as it leaves the flagship segment uncontested by Microsoft," Fogg told CNBC.

- By CNBC's Arjun Kharpal in Barcelona