Amazon is said to be launching a Kindle smartphone in 2012, according to reports.

Citigroup analyst Mark Mahaney is quoted on AllThingsDigital saying that the device is set for launch in Q4 next year.

His report, which is based on analysis of supply chains in Asia, also suggests that Amazon may sell the product at a loss to undercut its rivals.

Jon King, managing director of Story Worldwide, said it makes perfect sense for Amazon to make this move based on its content offering.

The smartest thing in marketing is social and what drives social is content. Amazon has an incredible array of content and has heavily invested in this, as well as the Android platform.”

King also highlighted several other devices that are sold at a loss to maximise profits on content, such as Sony’s PS3.

Amazon has also adopted a loss-leader sales strategy for its new Kindle Fire tablet, launched last week in the US at a price of $199.

Data from pre-orders suggests that it stands a chance of undermining Apple’s dominance of the tablet market.

Apple currently takes almost 70% of the global tablet market, but the iPad retails at $499 – as does Samsung’s and Sony’s offerings. 

In a separate report from Nomura, covered by paidContent, analysts suggest that consumers will be attracted by the comparatively low cost of the Kindle Fire over the superior usability of the iPad.

Amazon will reportedly make a gross merchandising loss of $10.63 per Kindle Fire sold based on 1m units sold, but the idea is to help add to the customer base for its digital content business.

Nomura projects that Amazon will rake in $1b in revenues in 2011 from digital content  - or 12% of all of Amazon’s media revenues.

Although the potential markets for tablets and smartphones are different, Amazon will probably use the data from the Kindle Fire to help decide whether the loss-leader strategy is a sensible option for its smartphone.

Whether Citigroup’s predictions about pricing are correct or not, Amazon will have to offer consumers something special to make any headway if it launches a smartphone so long after its competitors.