Google, the internet media giant, has had a large group of engineers working on a secret project for nearly two years now.  Rumors had leaked that Google was planning to manufacture a next generation of cell phones, which some observers creatively dubbed the "GPhone."  Now as a new report indicates Google's true intentions, it appears that the company has not only done a good job keeping the wraps on its secret project, but that the project is much more complex than expected.

Google has been working on developing a software platform for cell phones, which it hopes will create a new business sector.  It begins with the phone operating system (OS).  The OS that Google has been working on is a modified version of Linux, the open source OS.  Atop the OS, Google is modifying its Office suite, organization tools, maps, messenger, and email, along with the rest of its programs to run in cell phone environments.  The final piece of the puzzle is what Google hopes will make the phone truly profitable -- advertising.

Currently cell phone advertising is a fairly small and specialized business.  Google hopes to expand and transform this niche into a thriving new market sector.

To demonstrate its technology, it turns out that Google did build phone prototypes, which it has shown to manufacturers.  It has given no indication that it will put these designs into production, though.  Analysts think that such a move would be unlikely, due to Google's lack of hardware expertise.

Karsten Weide an analyst for IDC spoke to the possibility of them developing phone hardware. “Running a Web site and a search engine is one thing, but developing a phone is a whole different game. It will not be easy for them,” said Weide.

While no definitive word has been released by Google at this time, it seems clear that developing hardware was not the focus of its project.

Rather than competing with the iPhone, these developments reveal that Google intends to challenge Microsoft for mobile phone OS dominance.  Google has one clear advantage when it comes to its OS: the software comes at no cost, while Microsoft charges cell phone companies for use of its Windows Mobile OS.

Some see deeper motives to Google's moves than simply gunning for Microsoft.  They see Google's moves as an attempt to loosen the control that cell phone carriers have on their services and software on their network.

This may trouble some carriers such as AT&T and Verizon who have poured millions into developing proprietary network services.  As a resulth, they are unlikely to jump at Google's new technology until they see returns on their own.

Few have voiced opinions on Google's move, but the move is being criticized by one of Google's own partners.  Arun Sarin, the chief executive of Britain’s Vodafone Group, which currently carries Google Service on its phones, said it is unclear what compelling functions Google's platform would offer that are not currently available.

Sarin elaborates, “What is it that is missing in life that they are going to fulfill?  It is not a no-brainer. You can reach Google already through a number of devices. You don’t need a Google phone to do that."

Google’s actions over the past few years seem to confirm speculation that it is looking to cut control that carriers have over their network software and services.  The company recently successfully lobbied the Federal Communications Commission (FCC) to impose a set of rules on any carriers that win wireless spectrum bids in the upcoming auction.  The rules state that winning bidders who use their spectrum must open their phones to software and handset applications from any company.  Google may even bid for part of the spectrum according to recent reports.

Google's mobile phone team was built largely around Android, a small mobile software company it acquired in 2005.  Andy Rubin, co-founder of Android, had founded Danger, which produced the popular T-Mobile Sidekick.  Rubin is currently working on the mobile phone projects at Google's Mountain View headquarters.

Its chief competition, Microsoft, has released multiple versions of the Windows Mobile OS and is currently on its sixth iteration.  Microsoft currently has distribution agreements with 48 handset makers and 160 carriers around the world. Microsoft does not have a huge market share, though.  This year 12 million phones have been sold that are based on Microsoft’s software, giving it only 10 percent of the smartphone market, according to IDC.  This leaves much of the market up for grabs, which is where Google hopes to muscle its way in.

Richard Doherty, director for the Envisioneering Group consulting firm, thinks small carriers will be among the early adopters as they will jump at Google's free software offerings. If these are well received, carriers may be forced to adopt Google's platform. “No one wants to be the last carrier to endorse Google,” Mr. Doherty said.

Yet another possibility is that if the software platform is easy to download and install on a majority of phones, individuals who enjoy Google's online offerings may download its OS for their phones.  Such a system would be highly dependent on user effort, but users’ ability to unlock the iPhone has demonstrated that they can have the willingness and the ability to modify their phones, as long as helpful software is provided.  If Google goes this route, carriers like AT&T and Verizon with proprietary technologies may try to lock their phones from Google's software or "brick" phones that carry it, similar to Apple and AT&T's latest move to "brick" unlocked iPhones.

The developments from Google are intriguing.  While it becomes clear that its focus is on providing a software platform, the possibility of a Google-backed iPhone smartphone competitor remains.  Perhaps the party that should be most worried, however, is Microsoft, as Google looks to provide an OS with similar capabilities to Microsoft's free of charge.  Furthermore, Google's new advertising based business dynamic is set to provide the latest chapter in an ongoing move to provide media content for free, funded by advertising.