Amazon (smile box logo 001)

Having entered the tablet race with its Kindle Fire lineup in September 2011, the online retail giant Amazon has long been rumored to have been working on a smartphone of its own. The elusive product thus far has remained a pipe dream, which isn’t saying Amazon isn’t readying it.

In the meantime, the world has gone from reaping the profits from the lucrative high-end of the smartphone market to selling inexpensive Android handsets to emerging markets that now increasingly fuel growth. A $0 smartphone could be disruptive and a huge game-changer, but just what strings might be attached for customers here?

That’s the gist of a new report by the former Wall Street Journalist Jessica Lessin who says in a store sourced from “people familiar with Amazon’s effort” that a $0 Amazon smartphone is actually being considered.

The reason it’s taking so long?

Because Amazon can’t find hardware partners that are not tied to full Android devices approved by Google. Like its Kindle tablet series, the rumored smartphone would run a forked version of Android, which means replacing Google-preloaded apps with its own, especially software that connects to Amazon’s digital stores for movies, music and more.

Though it wasn’t immediately clear when Amazon would launch its free smartphone and whether the company would tie the device to its $79 a year Prime loyalty program. For what it’s worth, sources told Lessin that Amazon “wants the device to be free whether or not people sign up for a new wireless plan at the same time”.

In my personal opinion, Amazon’s strategy is bound to prompt resistance from carriers, who typically subsidize sought-after devices in exchange for long-term wireless contracts.

One person familiar with the effort said the company has talked to wireless carriers about offering its phones, though it is expected to offer them directly to consumers through its website. A launch date also is unclear.

Amazon could of course easily sell the device itself through its Amazon.com web store, but that’s no guarantee of success.

Look no further than Google – selling the Nexus branded smartphone online and unlocked eventually proved unfruitful so the company switched to tying up its phones to carrier contracts.

iTunes Radio (three-up, iPhone 5)

While the free strategy “isn’t set in stone” – it’s dependent on Amazon’s ability to work out financial arrangements with hardware partners – there’s no denying that a free Amazon-branded smartphone could prove itself a huge nightmare for the likes of Apple and Samsung, whose fortunes depend on selling pricey high-end devices.

And while Apple is expected to widen the price umbrella by introducing the so-called iPhone 5C – basically an iPhone 5 in a less-pricey polycarbonate plastic casing – it will still cost money, between $400 and $500 for an unsubsidized, off-contract variant, per analyst estimates.

Apple Store (iPhone 4, 450 USD)

IDC estimates that the average price of an unsubsidized cell phone has dropped from $430 to $343. And, emerging markets including China and India will account for about two-thirds of all smartphones shipped this year, per the research firm.

Amazon’s strategy could mimic that of console makers such as Sony and Microsoft which typically sell hardware at a loss in order to create a market for games because they earn a fee on each title sold.

Amazon is no stranger to ads that underscore its price advantage relative to the iPad.

http://www.youtube.com/watch?v=XtJBQHLdcM4

We know from CEO Jeff Bezos’s own admission that Kindle hardware is sold at cost.

By breaking-even on the hardware, the company hopes to establish the base of Kindle customers who will then use Amazon’s e-commerce services to buy digital media, books and other tangibles and intangibles from the online retailer.

Lessin acknowledges as much:

Offering a phone for free would be a daunting proposition. Amazon would have to find a way to make up for the cost of manufacturing — on average, $200 per smartphone — by steering device owners to shop for goods through Amazon.com and to purchase digital media and apps through its app store.

Oh, and don’t forget that Amazon has its own digital advertising business so it could recoup the losses by showing smartphone users ads, like it already does on the low-cost Kindle Fire tablet.

The question is: can such ad-supported free strategy work for smartphones?

In fact, would you ditch your iPhone in exchange for a $0 Amazon smartphone with some ads?