Chinese Smartphone Giant Xiaomi Teams Up With Microsoft to Boost Mobile Business

Microsoft is selling Xiaomi some of its patents as part of the deal.

— -- Chinese smartphone maker Xiaomi and Microsoft are teaming up in a new deal that could help bolster both companies' sluggish smartphone businesses.

The expanded partnership was announced Wednesday morning in China. As part of the deal, Xiaomi will purchase a trove of patents from Microsoft, a move that hints at the company's ambition to grow into new markets.

Patrick Moorhead, an analyst at Moor Insights & Strategy, told ABC News that having a patent portfolio would help protect the 6-year-old company from potentially being sued by rivals when entering a new market.

Beginning in September, Xiaomi will pre-install Microsoft Office and Skype on Xiaomi's Android smartphones and tablets, bringing Microsoft's mobile app experience to potentially tens of millions of new users, many of them in China and India.

Xiaomi has previously been called the "Apple of China" by some industry observers for its gigantic smartphones and tablets that have mass appeal. However, the company has struggled to hit its sales targets with increased competition in China.

The company also fell out of the world's top five smartphone makers in the first quarter of this year after it was overtaken by Chinese brands OPPO and Vivo, according to research from IDC.

"Xiaomi has high-quality hardware at rock-bottom prices that could ultimately resonate with consumers, but the company needs to make sure they aren't de-positioned as a low-price, low-quality vendor," Moorhead said. "First off, they will need to work on making their brand name fun in some way. At face value, their brand name 'Xiaomi' would be unpronounceable [in the U.S. market] so they will need a lot of work on that."

Microsoft announced last month that it is selling a part of its phone business, including licensing of the Nokia brand, for $350 million. The sale includes Microsoft's "entry-level feature phone assets," including brands, software and services, customer contracts and supply agreements to FIH Mobile, a subsidiary of Chinese manufacturer Foxconn, and HMD Global, a company based in Finland.

"Feature phones" are basic phones that focus on text and voice calling as opposed to smartphones that have expanded capabilities.

"The primary benefits to Microsoft are that Microsoft mobile software services like OneNote, OneDrive and Office 365 get premier status on Xiaomi handsets. This increases the likelihood the software and services will get purchased and used by consumers," Moorhead said. "This plays right into Microsoft’s extended mobile strategy, which is more about services and software than it is hardware."

It's been widely speculated Microsoft could build on the success of its convertible Surface tablets and leverage that product line to create a high-end Surface phone in the next year.