Bloomberg was told by “two unnamed sources” that Amazon is working with Foxconn to build the upcoming Android smartphone. The so-called Kindle Phone would likely run the same modified version of Android as its larger Kindle Fire cousin. In the meantime, Amazon has been going around acquiring wireless and mapping patents to protect itself against lawsuits down the road. Remember that Amazon currently doesn’t have any GPS-enabled devices.

The play here isn’t to make money on the hardware. That’s not the case with the Kindle Fire and it’s not the case with the Kindle Phone either. The play here is to sell consumers on all the content–books, music, movies, apps–and that’s where Amazon really makes its money. Getting more Kindle devices in more hands aids in that goal.

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For all intents and purposes, the original series of Kindle e-readers has been hugely successful for Jeff Bezos and the rest of the team at Amazon. They’re currently enjoying roaring success with the aggressively priced Kindle Fire. And now it looks like Amazon is ready for its next big move with the preparation of a so-called KindlePhone for next year.

According to Citigroup analyst Mark Mahaney, Amazon is carefully working with suppliers now to get the puzzle pieces in place for a Q4 2012 launch of a Kindle smartphone. This is “based on [Citigroup's] supply chain channel checks in Asia led by Kevin Chang, Citi’s Taipei-based hardware research analyst.”

These checks are revealing that Amazon is working with Foxconn to jointly develop the phone, but it’s not Foxconn that will be actually manufacturing the phone. Instead, Amazon will turn back to Hon Hai’s TMS business group to make the KindlePhone itself. This makes sense, since Amazon is already using TMS to make its Kindle e-reader and Kindle Fire tablet. We could be getting ahead of ourselves, since it’s still a year out, but they’re also mentioning that the KindlePhone will get a OMAP 4 processor by way of Texas Instruments and a “dual mode 6-series standalone baseband” (HSPA+ / EVDO) chip by way of Qualcomm.

Putting it all together, the total cost for a KindlePhone is being estimated at $150 to $170. Whereas other phone companies have to put in a normal 30% gross margin, that’s not Amazon’s modus operandi. They use these devices — just like the Kindle Fire — as a delivery mechanism for its digital products and subscription services, which is where the real money is made. If an unlocked KindlePhone is sold for $150 outright, that could be as big a game-changer as the $199 Kindle Fire.

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Amazon is known for their Kindle line which now includes five e-readers and a tablet. Many have wondered in recent years when they will join the smartphone producer list, considering their products sell like hot cakes.

The Kindle Fire already works on Android so why wouldn’t they use that same Operation System for, let’s say, a mini version of their tablet – a smartphone? Chances are they wouldn’t develop their own OS because it’s easier and cheaper to just implement an already existing one. Not to mention the Amazon Appstore designed for Android, which would make it weird for users of their products if they had to access two different stores.

Considering they pride in producing high-end quality devices and selling them for next-to-nothing, a Kindle phone could even come for free with a two year contract, or even if not for free, we’re sure it would cost very little. Maybe they will buy HP’s Palm arm at a bargain basement price and launch the Kindle Pre.

Photo: David Carnoy/CBS Interactive

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