Despite the rumors, the New York Times says that software will be the emphasis of the Google phone. While Google has created prototypes for show-n-tell, their objective is not creating a rival to the iPhone, just software to rival Windows Mobile.
Google wants to be everywhere to leverage the mobile phone's advertising potential. Miguel Helft, the author of the NYT report, says that:
In short, Google is not creating a gadget to rival the iPhone, but rather creating software that will be an alternative to Windows Mobile from Microsoft and other operating systems, which are built into phones sold by many manufacturers. And unlike Microsoft, Google is not expected to charge phone makers a licensing fee for the software.
He then cites industry sources, who point "that Google's strategy is to lead the creation of an open-source competitor to Windows Mobile." It makes sense, since Google has always been about the software and not the hardware, but it is still unclear how the whole thing will play out; especially when Google wants to "loosen the carriers' control over their networks" but they will need the carriers to sell the phone with Google software in them. [NYT]