Amazon may be stepping up its game in the mobile market. According to unnamed sources, Bloomberg reports, the e-commerce giant is developing a smartphone. Rumors of an Amazon Android phone are nothing new. But if Amazon does enter the Game of Phones, will it be able to succeed in the competitive landscape dominated by companies like Apple and Samsung?

The Summer Rumor Cycle

When it comes to mobile devices, summer is the time for rumors. There's not much else going on. The conference circuits of the spring, such as the Consumer Electronics Show, Mobile World Congress and CTIA, often come with flashy device announcements that are released by the middle of the year. The fall brings more hyped announcements, as manufacturers prepare their holiday headliners. Summer is what comes between - the time to speculate on what the fall lineups will look like. 

For instance, last year the rumor mill was abuzz about a tablet that Amazon was said to be releasing in the fall. Hither came the Kindle Fire, announced at the end of September 2011. At the same time last year, rumors floating around were all about the so-called iPhone 5 and what it would entail. While the rumors of Amazon’s entrance into the tablet market proved to be true, the tech press prognostications about the iPhone 5 (including the name, as Apple eventually released the iPhone 4S) were wildly inaccurate. 

At this time last year, the persistent rumors were that Amazon would release two tablets and a smartphone by the end of 2011. Only the 7-inch Kindle Fire proved to be true. So, make sure to take anything coming out of the Summer Rumor Cycle with a grain of salt. 

The Benefits of an Amazon Smartphone

There is little question that Amazon’s smartphone would be built upon Android. The Kindle Fire is a fork from Android, and Amazon has its curated Android Appstore as the centerpiece of its mobile content empire. The question would then become, which version of Android does Amazon decide to use for its smartphone? The outdated Android 2.3 Gingerbread is what the Kindle Fire was built upon, and Google has released several updates since then, with version 4.1 Jelly Bean as the most recent addition.

Any discussion about an Amazon smartphone has to revolve around digital purchases and Amazon’s retail store. The Kindle Fire is a product that is essentially a handheld Amazon storefront. That includes digital media such as movies and television shows on demand, music, e-books and apps. The Kindle Fire is a perfect device for digital content because its form factor, connectivity (Wi-Fi only) and user interface are designed specifically to get users to download or stream content. The Kindle Fire also provides a window into Amazon’s retail store where users can use 1-Click purchasing to buy physical goods. The purpose of such a device is straightforward and unassuming: Amazon wants you to buy all your digital and physical goods from it. 

The strategy for a smartphone will be similar, but the form factor necessitates a bit of a different approach. The Kindle Fire is not often a device that users carry around with them everywhere they go; that's not what the device was meant for. But a smartphone, almost by definition, goes where the user goes. Hence, if Amazon truly wants to maximize its potential as a mobile retailer, it cannot release a device intended simply to compete with the iPhone and top-end Android devices. Rather, it has to leverage that shopping connection.

Imagine you are in a retail store. You are thinking about buying a book, item of clothing or some type of device. Yet, in your pocket you have a direct link to the Amazon store with 1-Click purchasing. Instead of buying the item from the physical store, you end up buying it through Amazon because it offers a cheaper option. This type of mobile commerce has been dubbed “showcasing” by marketers, and Amazon would be in a prime place to take advantage of the phenomenon with its own smartphone.

Dizzying Logistics

Entering the tablet space was relatively easy for Amazon. It took an older version of Android, forked it, put it on some weak hardware and released it to the masses and told them to buy, buy, buy digital content. 

The smartphone market is entirely different. The logistics for Amazon are complicated by the need to provide 3G/4G data connections, voice and text messaging services. That, in one form or another, necessitates a deal with a mobile carrier or data wholesaler. This is an arena that Amazon has dabbled in with its Kindle e-reader devices with 3G connectivity, but not at the scale that would be required for a fully functional touchscreen smartphone. Amazon is classified as a mobile virtual network operator (MVNO), which means that it piggybacks on carriers’ wireless networks to provide data to its users. That is done through a wholesale approach where Amazon buys data from the carriers and passes it on to users. 

As an MVNO, Amazon could enter the smartphone race from a different angle than other manufacturers. Top-of-the-market smartphone makers tend to go the route where they sell devices to the carriers at full cost and the carriers subsidize the price of the device to the consumer by making them sign one- or two-year contracts. Want an iPhone for $199? Better be prepared to sign with AT&T, Verizon or Sprint for two years. Yet, if Amazon can work out a deal with the carriers to piggyback on their networks for its smartphone, Amazon could sell its smartphone directly to the pre-paid market, essentially attacking the market from a different angle than Apple, Samsung and most other Android manufacturers. Apple has only recently entered the pre-paid market with Cricket and U.S. Cellular partnerships. 

Instead of making carriers subsidize devices directly, Amazon could sell the data, voice and text plans itself and offer the smartphone through its own retail store. Amazon could also subsidize the cost of the device through ads, the way it does with its cheap Kindle With Special Offers e-readers. In that way, it is feasible that Amazon could enter the market with a decent device at the $99 range, a price point that would be attractive to many consumers who do not have a smartphone or are looking for cheaper options with lower monthly costs. 

If Amazon does not go the pre-paid route, it will have to come to some type of arrangement with the mobile carriers to offer the device in their stores with some type of subsidy. That would also mean that an Amazon smartphone would be on shelves next to a variety of devices from high-end Androids and Windows Phones to the iPhone, as well as battling in the mid-market of BlackBerry and cheaper Android phones. In a world where shelf space is at a premium, that might not be the best route for Amazon. 

So, the biggest question for Amazon is not the benefits of its digital media and retail-store-in-your-pocket approach, but rather how it navigates the world mobile carriers, spectrum and data. Whatever avenue Amazon uses in that area could make or break its efforts to enter the smartphone market.