But there are two major market forces that could be factoring into Amazon's decision that now is a good time to enter the smartphone market. The first is that tablet sales have flatlined: People aren't buying them at the same clip as they used to, even though prices are at an all-time low.

"If Amazon is trying to gain a bigger footprint, then tablets have limits," says Harry Wang, director of mobile product research at Parks Associates. "The next frontier is the shift to smartphones, because that's a bigger market."

Second is the rise of the phablet. Smartphones with big screens have been popular for a while, with the average size of a flagship Android phone now a little over 5 inches. Some are over 6, and there are rumors of even 7-inch phones on the way. With larger screens and ever-faster processing power, today's phablets are almost as good as tablets at "consumption."

If Amazon is feeling the squeeze on tablet sales, it would likely see the smartphone market next door — an order of magnitude larger — and decide it couldn't ignore that opportunity any longer. Building the hardware would be relatively easy, given its Kindle legacy.

Standing out from the crowd
Of course, in today's smartphone market, hardware's the easy part. What's hard is differentiation — giving customers a reason to pick your phone over competitors. Amazon's teaser video appeared to imply that some kind of visual feature (3D holograms, perhaps?) would make its new smartphone stand out.

Whatever the novelty is, it's almost definitely not what people will buy an Amazon phone for. Innovative hardware might generate headlines, but it doesn't sell phones, where people mainly care about design, user experience and app availability.

Amazon has other ways to differentiate its smartphone, however. It could offer an new kind of app or service that's exclusive to owners. An Amazon phone could offer a custom-designed mobile shopping experience An Amazon phone could offer a custom-designed mobile shopping experience, which would be attractive to many users. Parks Associates says 39% of all smartphone owners use retail apps — and that they're used, on average, only slightly less than video apps such as Netflix and YouTube.

More likely, Amazon will launch its phone with a new pricing model. The company has always been aggressive in pricing its Kindle tablets, and it'll no doubt do the same with a theoretical smartphone.

What would really take things to the next level, however, would be if Amazon offered its smartphone with a free (or nearly free) data plan. The company already sells LTE versions of its Kindle Fire tablets with free limited data. What if it convinced just one carrier to extend that model to a phone?

Whatever the pricing model ends up being, you can bet Amazon Prime membership will factor in. Chances are high that any owner of Amazon hardware is also a Prime member (Kindle e-readers excepted). The service will likely come bundled with the smartphone in some way; perhaps Prime members will get discounts on wireless services.

"They already have about 22 million prime members," says Wang. To those members, he adds, "Amazon could offer a great value in a smartphone."

From the article, "Why an Amazon Phone Makes Sense" by Pete Paschal.

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