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With the Amazon Kindle Fire creating a splash, it was almost inevitable that rumors would resurface of a smartphone from the retailer. In many ways this would be a backward step - a phone does not drive content consumption or online shopping, Amazon's key drivers, to the same extent as a larger-screened tablet or e-reader. But research by Citigroup suggests the web giant does plan a handset next year, citing supply chain channel checks.

This would presumably be tightly integrated with Amazon's Android Appstore and its other shopfronts and support the innovative Silk browser, which made its debut on the Kindle Fire and promises more efficient use of mobile resources by doing most of the processing in the cloud. But Amazon is already gaining ground on Google's Android Market via its existing apps for third party Android handsets, so there will only be a point to launching its own smartphone if it can significantly improve on the usual user experience for the Google OS, in order to drive greater content consumption.

Amazon - whose CEO Jeff Bezos has stressed that the firm is "the only hi-tech company that operates on low margins" because of its roots as a retailer - may also use those economics to price its handset very cheaply, as it has done with the Fire. It could deliver greater functionality than most low cost Android phones, to appeal to the prepaid base, reducing reliance on carrier subsidies, and even support its own MVNO, or embedded data connectivity (as in the Kindle e-readers).

According to Citigroup, the smartphone will cost between $150 and $170 to manufacture, and the firm thinks Amazon would sell it for very little profit in order to boost uptake and stimulate its content and app sales. "For a normal brand like HTC, they need to price the product at $243 to make 30% gross margin," says the research note. "If Amazon is actually willing to lose some money on the device, the price gap could be even bigger."

We may certainly expect that, if Amazon decides to go ahead with a phone, it will do something radical with the business model as it has in tablets and e-readers - there is no point to bringing out a me-too smartphone which would force the firm to compete as a hardware vendor per se.

Citigroup does not think the retailer will take the plunge until the last quarter of next year, based on its channel checks in Taiwan. Analyst Mark Mahaney thinks the Foxconn/Hon Hai group will codevelop the device as well as manufacturing it (it does the same for the Kindle e-readers and tablet), and that Amazon will stick with the same chip families as the Kindles - TI OMAP 4 and Qualcomm basebands.

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