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Image source: Xiaomi.

Microsoft (NASDAQ:MSFT) and Xiaomi have reached a deal.

Microsoft has sold some 1,500 patents to the highly valued Chinese start-up. In addition to cutting the Windows-maker a check, Xiaomi has agreed to install several of Microsoft's mobile apps on its devices, including Word, Excel, Outlook, and Skype. The deal appears mutually beneficial, with Microsoft getting its apps in front of more users, and Xiaomi the intellectual property it needs to expand into Western markets.

An undisclosed sum

Microsoft has billions of dollars worth of intellectual property. Its patents involve all sorts of technologies, including mobile. In fact, most Android handset makers pay the Redmond tech giant royalties, as it holds patents central to the operating system. In 2013, analysts at Nomura estimated that Microsoft was collecting some $2 billion from Android OEMs each year.

It's not clear how much Microsoft will make from its deal with Xiaomi. The company didn't disclose a figure, and didn't mention it in its earnings report earlier this month. What's more interesting is its deal to put its mobile apps in front of Xiaomi's millions of customers. Going forward, when a customer buys a phone from Xiaomi, they'll be greeted with a collection of Microsoft mobile apps on their home screen.

Outside of the small (though admittedly growing) market for Windows 10 hybrid devices, Microsoft has become irrelevant in mobile computing, as Windows Phone's market share has dwindled to almost nothing. In recent years, Microsoft has worked to shift its approach, building and acquiring popular mobile apps and taking steps to encourage Android and iOS users to make use of its mobile software. Microsoft's deal with Xiaomi isn't the first of its kind, either: last year, Microsoft signed a deal with Samsung to put its apps on the Korean tech giant's popular Galaxy handsets.

Microsoft's strategy is working. "...customers increasingly experience the power of Office on their iOS and Android mobile devices. In fact, we now have more than 50 million iOS and Android monthly active devices, up more than four times over last year," said CEO Satya Nadella on the company's most recent earnings call.

Microsoft may not be able to get consumers using Windows Phones, but it's gotten them to use its mobile software, and that's translating into tangible revenue. Microsoft now has 23 million Office 365 subscribers, up from 20.6 million in January, each paying around $10 per month. Office 365 confers many benefits, including cloud storage and access to Office desktop apps, but its mobile accessibility may serve as pillar of its popularity.

Xiaomi is one of the most important handset makers in the world, particularly in its home market of China. Adding Microsoft apps to Xiaomi phones could help Microsoft add even more Office 365 subscribers in the months and years ahead.

Building a warchest

The deal gives Xiaomi the intellectual property it may need to launch a credible expansion into Western markets. Currently, Xiaomi's handsets are restricted to a handful of markets, mostly in Asia, including China and India. But earlier this year, Xiaomi vice president of international Hugo Barra said the company planned to expand into the U.S. at some point in the future.

Although Xiaomi disputes it, industry observers have often faulted the company for copying its competitors, most notably Apple (NASDAQ:AAPL). Xiaomi may be able to get away with its antics in China, but any attempt to sell its phones in the U.S. or other Western markets could be met with a flurry of lawsuits. At least, that may have been the case before -- with its bundle of patents from Microsoft, Xiaomi could be better positioned to legally defend its products.

The last 12 months has been disappointing for Xiaomi, as its handset shipments have fallen short of its lofty sales projections. Xiaomi was once the fifth-largest handset maker in the world, but fell out of the top five earlier this year. Other Chinese firms, notably Huawei, seem to have taken market share from the company.

Nevertheless, Xiaomi still managed to ship more than 70 million handsets last year, and it was the leading seller of smartphones in China from March 2015 through June, pushing Apple out of the top spot in the process.

If and when Xiaomi enters the U.S. market, it could provide more competition for the iPhone, and for other smartphone-makers. The company has yet to announce a formal U.S. strategy, but its deal with Microsoft could be an important first step.

Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on 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.