Amazon is preparing a Kindle Phone for 4Q 2012, expected to sell for as low as $150 to $170, says Citigroup. Meanwhile, Foxconn, which is rumored to be building the smartphone, will help build an upcoming 8.9-inch version of the Kindle Fire, says a report, and Piper Jaffray has upgraded its Kindle Fire 4Q sales estimates from 2.5 million to four million units.

Now that Amazon's Kindle Fire tablet is nearly a week out the door, the high-tech media can drool over the next hot gadget rumor: the Kindle Phone. Citigroup analyst Mark Mahaney told clients in a research note that hardware checks in Taipei indicate the e-commerce giant will launch a smartphone in the fourth quarter of 2012.

"Based on our supply chain check, we believe FIH (Foxconn International Holdings) is now jointly developing the phone with Amazon," wrote Mahaney, as reported by AllThingsDigital. "However, we believe that Amazon will pay NRE (non-recurring engineering fees) to FIH, but the device and multiple components will actually be manufactured by Hon Hai's TMS business group."

Hon Hai is the parent company of Foxconn Electronics. According to a Nov. 21 report from DigiTimes, Foxconn will join Quanta as a second original device manufacturer (ODM) for the seven-inch Kindle Fire tablet (pictured).

According to the story, Foxconn will begin production on an 8.9-inch version of Kindle Fire in the middle of the second quarter of 2012. This will be followed at a later date by a 10.1-inch model, says DigiTimes.

According to Mahaney's research note, the Kindle Phone will follow the Kindle Fire's lead in using a Texas Instruments OMAP 4 processor. In addition, it will "very likely" adopt Qualcomm's dual-mode 6-series standalone baseband, writes Mahaney.

The Kindle Phone is likely to cost between $150 and $170 to manufacture, with the company likely selling it for something close to that price, Mahaney wrote. That would follow the business strategy of the Kindle Fire, which sells for $200, but costs $201.70 to manufacture, according to a recent components analysts from IHS. Mahaney did not say what operating system Amazon would use, but suggested the company will stick with the same modified version of Android it uses on the Fire.

The Kindle Phone may well succeed as a more mobile extension of the shopping-focused Kindle Fire. Imagine Amazon baking its one-click purchasing mechanism into a Kindle Phone, with consumers able to point the phone at an item, scan it, and click a button to buy it. Amazon has already built an augmented reality app called Flow to let shoppers use their iPhone camera to scan goods for more information.

Price cutting not as effective in phone market, says analyst

Yet, the smartphone market is crowded, cutthroat, and increasingly litigious. If Amazon uses Android, it will likely have to pay Microsoft for that pleasure — if it hasn't already. The company signed an earlier patent agreement with Microsoft over the use of Linux in the Kindle e-reader, and Quanta has signed a similar deal with Microsoft regarding Android.

In an email to eWEEK, Current Analysis analyst Avi Greengart echoed some of these challenges.  Greengart wouldn't rule out the prospect of a Kindle Phone, however, noting that Amazon has broad ambitions, and is building an ecosystem of digital content and cloud services — not unlike what Apple has done with its iPhone and iPad.

"Tablets are nice to have, but phones are necessities," wrote Greengart. "However, the phone market is crowded and Amazon's primary market, the U.S., is carrier-dominated. Just because Amazon launched a tablet does not mean it will launch a phone, and if it does launch a phone there is no easy guarantee of success, particularly if it intends to compete on price."

According to Greengart, competing on price works better for tablets where consumers tend to pay the full price of the product. "With phones, getting higher carrier subsidies is key — consumers rarely see the true price of the phone," he writes. "Besides, Samsung and Apple have far greater economies of scale, and some of their money-losing competitors are already effectively selling their devices below cost."

Still, the smartphone market doesn't seem to be shrinking anytime soon. That may make a Kindle Phone too juicy to pass up for Amazon, which rarely misses an opportunity to sell more goods and services.

Kindle Fire Q4 sales estimate upgraded to four million units

Amazon will also no doubt be encouraged by the early sales of the Kindle Fire. In a research report posted Nov. 18, several days after the Fire began shipping, Piper Jaffray analyst Gene Munster, upgraded his projection for fourth quarter sales for the tablet from 2.5 million units to four million units.

This is despite the fact that Barnes & Noble's new, $250 Nook Tablet, which has already been rooted to give it unofficial Android Market access, has arguably received better reviews. The two e-reader focused tablets are set for a major holiday showdown, according to this Nov. 21 analysis in eWEEK by Wayne Rash.

Clint Boulton is a writer for eWEEK.

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