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The Case For an Amazon Smartphone

Now that Amazon has launched the Kindle Fire —which is virtually assured to be the bestselling Android tablet of the year — there's a new rumor afloat: That Amazon is building a phone.

The first real fuel for that rumor came today from Citi analyst Mark Mahaney, who wrote in a note that his channel checks suggest Amazon is using some of the same partners that assemble the Kindle to put together a phone.

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To a skeptic, an Amazon phone might seem like a boondoggle. It's one thing for Amazon to sell bargain tablets, pricing the hardware at cost and counting on future retail business to provide the profit. But doing the same thing with phones? Seems like a non-starter. After all, carriers already subsidize the phones.

But here's why an Amazon phone might not be so crazy after all:

The main justification for Amazon doing hardware is that it paves the way for future merchandise sales. Putting a tablet in the hands of an upscale consumer is a little like putting a physical store in an upscale mall: It serves as both a visible reminder of the retailer's presence and as a way to crowd out competitors.

So. Why a phone? A tablet is great for media consumption, but if you want to steal sales from brick and mortar retailers, I believe the phone is the way to do it. Over the past year, my iPhone has become my primary tool for Amazon ordering; whenever I'm shopping in a store (or running out of something at home), I'll scan a bar code into the Amazon app and instantly comparison shop. Tablets — even 7-inch tablets — are too cumbersome for that kind of use case.

Done right, a phone could serve as a major accelerator for Amazon's business outside of media and electronics. The question is, what would be in it for the consumer? And that's where this gets complicated for Amazon.

I think for Amazon to do a phone and do it well, it'll have to become an MVNO. It can't just sell handsets onto someone else's network; it'll have to take control of a bigger chunk of the customer experience. Amazon is in a decent position to do this on, say, Sprint's network, because it already has a relationship through Kindle products.

Amazon's challenge would be coming up with a value proposition that beats existing carriers. Here's how they'd probably have to do it: Charge less than $100 for the phone itself, and a flat rate (like $30) per month for a generous helping of voice and data. How could Amazon get away with charging so little for data? They'd probably have to make data unlimited if you're streaming it from an Amazon app, but more expensive outside its ecosystem. In other words: it's free to shop on Amazon, or download Kindle books, music and movies -- maybe it's more expensive to use outside services.

Oh, and of course throw in an Amazon Prime membership for good measure.

Questions? Comments? TechCheck@cnbc.comAnd you can follow Jon Fortt on Twitter @jonfortt

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