Analysts at Citibank report that, based on their “supply chain channel” research, they believe Amazon is following up on its low-priced Kindles with a smartphone, which could be released next year. They speculate that Amazon could sell the phone at a loss, and presumably make up the difference by selling e-books, music and other digital media to mobile customers.

The analysts, Mark Mahaney and Kevin Chang, have broken down Amazon’s costs, and believe the company has an edge over traditional mobile phone manufacturers:

[W]e estimate Amazon’s overall costs should be around US$150-170. What is important to note is that Amazon does not need to make money on hardware. Hence, it can sell this mid-end dual core smartphone to carriers at US$170 in 4Q2012. For a normal brand like HTC, they need to price the product at US$243 to make 30% gross margin. If Amazon is actually willing to lose some money on the device, the price gap could be even bigger.

Amazon may already be in talks with Foxconn International Holdings—the Chinese company that builds Apple’s iPhone—to help develop the device. Mahaney and Chang speculate that actual production would probably be carried out by the same company that makes Amazon’s Kindle tablet and e-book readers, however.

“With the clear success of the Kindle e-Reader over the past 3 years, and Kindle Fire possibly succeeding in the low-priced Tablet market, we view this as the next logical step for Amazon,” the Citi report says.

Equity analysis of AMZN (Amazon) [Citi]

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