I realize this news is going to traumatize a lot of gadget nerds, especially Gizmodo editor Brian Lam, with whom I've had a running back-and-forth on the Googlephone. I'll save Lam the trouble of writing one of his "Yes, but ..." retorts. Let me nutshell it for you: It's not about the hardware, it's about the operating system and customization and integration with Google's apps. Nonsense.

Here's what it's really about: Fear. Google cofounders Larry Page and Sergey Brin got spooked in early 2006 when they heard that Microsoft was putting its Windows Mobile operating system on 90-plus smartphones that year. So they threw a rumored $100 million in Google shareholders' hard-earned cash on a crash Googlephone project.

Cooler heads have prevailed, though. Yes, it's smart for Google to optimize its services for cell phones. But they don't need hardware or software to do that. Nor do they need exclusive deals with carriers, though those might help a bit with distribution.

The Googlephone, however, has worked like a charm in two ways: First a threat. The Googlephone was a useful fiction, a way to scare carriers and phonemakers into cooperating with Google, and spook Microsoft into cutting its licensing fees for Windows Mobile. To perpetuate that fiction, Google apparently went as far as ordering up some prototypes from HTC — an elaborate Potemkin village of gadgets.

Second, the Googlephone functioned as a fantasy. A very useful fantasy. Like the Apple rumor mill, the cottage industry in Googlephone speculation served as free, crowdsourced market research. Gizmodo, Engadget, and the rest spun countless feature wishlists out of Larry and Sergey's phone folly.

Too bad it was all for naught. There is no Googlephone, folks. Move along.

And for those gadget-heads who were taken in by all of this, and are now disappointed, here's a thought: If you think you feel crushed, how do you think Microsoft and the wireless industry will feel once they figure out that Google has played them for the fool?

So why is Google wasting programmers' time working on an operating system? Microsoft, its archenemy, offers wireless carriers a bundle of its Windows Mobile operating system and applications, chiefly email and calendar software, designed to run on top of it. Microsoft's search, too, is baked in. To compete with that, Google needs to offer a similar bundle. There's nothing about Google's wireless offerings that require an operating system; on PCs, Google does quite well running in a Web browser on top of any OS. The operating system, then, is just a competitive tool to shut out Microsoft.

Gadget enthusiasts, naturally, remain fixated on feeds and speeds. What will Google's new operating system be based on? (Linux, the Times says.) What applications will it run? (The usual sort.) These are not the questions to ask. The key question is whether Google will be able to saturate cell phones with enough advertising to subsdize the cost of handsets and monthly service fees.

Let's stop talking about the Googlephone, or the GPhone, for a moment, and consider this: Apple, in an accounting move, currently spreads the revenue for an iPhone over 24 months from the time you buy it. The cost of the handset, then, works out to just under $17 a month. Could Google conceivably sell $17 of advertising a month per user? Google, with 495 million users worldwide, is expected to rake in $14 billion in advertising, which works out to about $2.40 per user per month. So clearly, it's a long way off. Then again, wireless ads, in theory, would be much more personalized and targeted, and could thereby command higher prices.

The bottom line: If you love the iPhone right now at $399, imagine how much more you'd love it if it were free. That's the true promise of a Google phone.

Google Spain CEO Confirms Google Phone [Noticias.com via Gizmovil]