Over the past year we’ve heard rumor about a cellphone Google supposedly has had in the works. Talk seemed to have died down recently with all the cellphone hoopla squarely on Apple and its iPhone – and given Google’s warm relationship with Apple it seemed unlikely they would try to compete directly with them in their new massive venture. But now the story of the Google phone is red hot once again as the company supposedly showed off a prototype to vendors.

Okay, so Google wants to get into the cellphone business – huge news, but not even the biggest. Word is that they hope to offer their phone for free – including the service! Google would be taking a page from their own book hereby opting to make their money off of serving customer’s ads on their phone just like they do currently in applications like Gmail. While exciting, this is hardly a new idea from Google. Back in November Eric Schmidt made Google’s position very clear:

“Your mobile phone should be free,” Schmidt told Reuters. “It just makes sense that subsidies should increase” as advertising rises on mobile phones.

What I find interesting – and somewhat confusing – is that while Google can supposedly have their phones ready to go within a year, this is clearly a long term plan for Google. Yet for a company that already has a huge blanket WiFi system in place (and could roll out more in other cities) do they really have faith that the cellular networks will withstand the WiFi onslaught that everyone knows is coming?

Now if this were a WiFi phone, that would make a lot more sense to me. Especially if it was WiFi in conjunction with some cellular service for areas not under the WiFi blanket…like say a cellular service that Google could offer up if their bid for the wireless spectrum goes through…

One thing is for certain: between the iPhone and now Google’s “gPhone” – the cellular carriers are in big trouble. After years of raking America over the coals with their ridiculously closed and expensive policies, they’re getting schooled by the big boys in the computer and Internet industries. The shift to the phone makers having the power is on, and it will only get worse: you just know Microsoft is working on a phone too…