Google phone would be free with ads and probably out in the second half of 2008

Businessweek reports that wireless industry consultants and marketing executives with knowledge of Google’s plans say it has been showing prototypes of a new phone to handset manufacturers and network operators for a couple of months Industry sources don’t expect one before the second half of 2008.

Combine Google’s financial heft with its ultra-sophisticated ability to target ads to specific customers. “The day is coming when wireless users will experience nirvana scenarios–mobile ads tied to your individual behavior, what you are doing, and where you are,” says Linda Barrabee, wireless analyst at researcher Yankee Group.

The more than 2 1/2 billion phones in use worldwide exceed the number of PCs and TVs combined. On Sept. 17, Google announced a Web program aimed at advertisers who have created sites for display on cell phones and other handheld devices. Like its online ad network, Google’s AdSense for Mobile delivers ads relevant to the advertiser’s mobile audience. Employing technologies that figure out where callers are and where they’re headed boosts advertising prices by 50%.

If Google decides to spend the $4.6 billion that may be needed to win the spectrum auction, analysts speculate that it has several options: continue its broadband expansion, or perhaps buy a wireless carrier, such as beleaguered Sprint Nextel (S ). Then it could launch the first ad- supported, and free, nationwide phone service. “Google is the first gambler sitting down with as big a bankroll as the carriers have,” says John du Pre Gauntt, a wireless industry analyst for researcher eMarketer. “By playing in wireless, they have caused people to look at the industry in a different way.”

Google is buying mobile social networking sites like Zingku and