An Amazon employee displays the company's Kindle Touch e-reader last year. Reports say they may be adding a smartphone.

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Report: Amazon is working on a smartphone

Amazon already has app store, and its own version of Google's Android system

Selling phones would put them in an already crowded market, though

CNN  — 

Amazon may be coming out with its own smartphone, according to a new report from Bloomberg. The company reportedly is working with Foxconn to develop the hardware, which will likely run Amazon’s version of the Android operating system.

A phone isn’t as far-fetched of an undertaking as it might seem for the company, which has never made a handset. Amazon already has many of the building blocks it would need to make money off a smartphone, including its own version of the Android operating system, an established app store and well-stocked content marketplaces that could make up a good chunk of revenue for the phone. It also has a pool of loyal customers who trust the brand.

Amazon is relatively new to the hardware game. The company’s first entry was the Kindle e-reader released in 2007, followed by its Android-powered big brother, the Kindle Fire tablet. Amazon has had more success than many other companies in the tablet market thanks to getting in early and a low price made possible by revenue from books, movies and music.

However, the smartphone market is already filled with well-established competitors. Current market leader Samsung shipped 42.2 million smartphones worldwide in the first quarter of 2012, according to research firm IDC. Apple was a close second with 35.1 million smartphones, followed at a distance by Nokia and Research In Motion.

There are also some challenges unique to selling smartphones. To build a decent device, Amazon will need the right patents so it doesn’t end up on the receiving end of costly lawsuits. To that end, the company just hired a new general manager for patent acquisitions and investments, Matt Gordon.

Dealing with carriers would be another hurdle. Ina Fried at AllThingsD floated an intriguing theory: Amazon could buy wireless service wholesale from the big carriers and bundle it with the devices, like it does for the Kindle.

The rumor that Amazon would unveil a smartphone late this year surfaced in November 2011, when Citigroup’s research department predicted the device based on its supply chain checks in Asia. The new report, based on two anonymous sources “with knowledge of the matter” supports the original theory floated by Citigroup.