A report from the brokerage firm Citigroup concludes that Amazon is likely to produce an iPhone competitor in the fourth quarter of 2012. Calling it “the next logical step” for Amazon, Citigroup says it reached its conclusion after conducting “supply chain channel checks” in Asia. Citi believes that Amazon is working together with Foxconn, the manufacturer of the iPhone and many other devices, to develop the Amazon smart phone, which Citi thinks is likely to use a Texas Instrument OMAP 4 processor, which will make the phone a “mid end device” by late next year.

Though I contested the idea that Amazon’s purchase of Yap represents a bid for a Siri competitor, it’s not surprising to learn that Amazon is indeed going after the smart-phone market. Many have been predicting this since the launch of the Kindle Fire, and well before. A New York Times report about the Amazon lab that developed the Kindle from back in August 2010 discussed a potential Amazon smart phone. The Times quoted an anonymous source saying that Amazon was weighing the idea, though at the time it “seemed out of reach.”

No longer, apparently, if Citi’s sleuthing is accurate. The research note from the firm has set the tech blogosphere into a collective fever dream, imagining the possibilities a Kindle smart phone—a Kindle Spark? Kindle Flint? Kindle Matchstick?—might bring. The mantra to bear in mind, of course, is Jeff Bezos’s now semi-famous comment during the Kindle launch: how Amazon could afford to be “building premium products and offering them at nonpremium prices.” It all hinges, of course, on leveraging Kindle hardware to fuel further business in Amazon’s universe of content.

Could Amazon therefore afford to sell the phone at cost, something like $150? Or could it sell it at a loss, as it is already believed to do with the Kindle Fire? Or—man bites dog—might Amazon even pay you to own its phone, in the form of a service credit? Dan Frommer imagines the latter to be possible, in his own experience, blogging that in or around 2004, Amazon essentially “paid” him “something like $200 after a rebate to ‘buy’ a new cell phone and move my account to T-Mobile.”

Questions abound. Would the Amazon phone be an Android device (most likely), or might it snap up HP’s moribund WebOS to build its own smart phone experience? Might it be an unlocked, multi-carrier phone? Or, while we’re allowing our imaginations to run wild, might Amazon decide to get into the business of being a mobile virtual network operator unto itself, cutting out the thicket of middlemen? One blogger, Jean-Louis Gassée, recently advocated for Apple to buy a carrier. In an era where Google is bidding to be your next cable company, stranger things have happened.