Amazon may indeed be planning to leverage its digital content store of movies, TV, music, e-books, and Android apps to help sell a full-fledged tablet of its own. A new report suggests that Taiwanese manufacture Quanta has received orders from Amazon to begin building as many as 700,000-800,000 tablet devices per month to begin shipping in the second half of this year.

The information comes from sources inside "upstream component makers" that told DigiTimes that Amazon's business could add up to $3.5 billion to Quanta's revenue for 2011. While DigiTimes doesn't have the best record on such advanced device rumors, Quanta already builds RIM's PlayBook, which we noted had excellent build quality. This particular rumor also gels with earlier analysis by Forrester researcher Sarah Rotman, who suggested that Amazon was in the best position to compete with Apple in the tablet space if it could put together decent hardware with a color screen.

"Amazon could create a compelling Android- or Linux-based tablet offering easy access to Amazon's storefront—including its forthcoming Android app store—and unique Amazon features like one-click purchasing, Amazon Prime service, and its recommendations engine," Rotman wrote earlier this year.

We have been skeptical of Amazon jumping into the tablet market in the past, but Barnes & Noble may have inadvertently shown Amazon that building a a compelling, low-cost Android tablet could be a good strategy for the Seattle-based company. The $249 Nook Color was originally Barnes & Noble's color Kindle alternative with a few tablet-like features somewhat hampered by an outdated Android version. However, the company recently supercharged the device with Android 2.2, boosting its Web browsing prowess and bringing with it a highly curated selection of apps built with a Nook-specific SDK.

Combine Amazon's vast repository of MP3s, Kindle-format e-books, streaming TV and movies, and its own branded Android Appstore with touchscreen hardware at least as well made as the Kindle, and Amazon could offer the best iPad competition. Having its own source of Android apps outside of Google's Android Marketplace also gives Amazon plenty of room to differentiate both its hardware and Android's UI from Google's stiff compatibility requirements. That could give an Amazon tablet an additional leg up against competition from the likes of Samsung's Galaxy Tabs and the Motorola Xoom.

While this sounds wonderful in theory, DigiTimes sources also claim that E-Ink Holdings, which makes the crisp, easy-to-read e-ink display used in current Kindle e-readers, is working with a touch panel supplier to ensure a supply of displays for Amazon's purported tablet.

However, EIH's vice president of global sales, Sri Peruvemba, told CNET this week that any new display technology is at least a year off. "We're generally on a two-year cycle with our e-ink technology," he said. "It takes some time to develop and test the next generation."

EIH has a color e-ink prototype that it showed off earlier this year at CES, but based on what we have seen, color e-ink tech just isn't ready to compete with color LCD displays when it comes to color saturation, brightness, and refresh rate. Any Amazon tablet would have to use color LCD to compete with the likes of the iPad at the high end or the Nook at the low end.