There must be a new virus in Silicon Valley because whenever Google sneezes, a lot of people fall ill.

The latest wildly spreading contagion is the under-disclosed and over-hyped G-Phone (or GPhone depending on which news writer is sober enough to meet his deadline). Google has let slip it is doing something in the mobile space, and the few clues have led many to believe they will introduce yet another mobile operating system, butting heads with Windows, Symbian, and a hoard of completely unaligned Linux mutant variants.

There is good reason for Google, or anyone else to want a piece of this action. It is a huge industry and one that is growing at previously unimagined speeds. This rate of growth shouldn’t be surprising because the industry gives people cheap, portable personal computers with built-in telephony and music capabilities. Cell phones are the unified communication hubs that never materialized in the data center, because unlike central servers managed by malcontent IT droids, cell phones are intimately personal.

The rumor de jour is that Google is creating a Linux-based mobile operating system that will be open, unlike the status envy-inducing device known as the iPhone. Google will allegedly create hooks to facilitate (Google) advertising and payment services on the phones, but otherwise not bar any adulteration of the device. More than anyone aside from Linus Torvalds, Google understands that open platforms promote innovation by making the platform accessible to every lunatic developer on the planet.

Allow me to explain by example. Cell phones started hitting the market about 25 year ago. Granted that is an eternity in the technology business, but would not rank as a nap for a cat in real life. When the first clunky, expensive, and range-limited devices were introduced, nobody thought you would one day Bluetooth AC/DC tunes into your dashboard from the same device, albeit one that now slides into your shirt pocket. In short, nobody knows what is possible until someone tries it. Since organizations (even Google) have limited resources and myopic mindsets, they cannot dream every dream.

Thus, the rumors of a open operating system developed by Google seem realistic. non-Google innovation is needed to drive long-term G-Phone adoption. iPhones maybe cool, but G-Phones may be enduring.

I have counseled Wind River on this very topic. They are well aware that the mobile phone market is ripe for standardizing on Linux. The problem is that there are already numerous Linux derivatives for mobile, as well as competing mobile Linux standards groups. Months ago, one of their team asked me how Wind River could dominate the mobile Linux market and I said “be the hub for extra innovation.” In short encourage as much inventiveness on Linux phones as possible to drive handset manufacturer and developer preference. This worked for Microsoft in the early days as they made it relatively cheap for anyone to cut code for Windows. Today GNU and Eclipse are tools used to make it easy to cut code everywhere.

Google (and Wind River if they venture forth) need to generate adoption volume to make their money on tangents. For Google, advertising is their primary path. However, they are also very good at location services, such as locating for you where the nearest Thai restaurant. Telephia estimates the location-based services ate 51% of all 2007 mobile application generated revenues. Tough a paltry $118M industry at present, it is expected to grow as people discover the utter usefulness of mobile apps, and as older handsets are retired.

The funny part is that Google might not need to do more than deliver the OS and encourage adoption. If other people develop mobile applications, and Google examines the raw data underneath, then they can deliver targeted advertising even without providing content above what they do now with mobile maps, Google local, and roaming GMail.

If predictions of Google’s mobile market direction are true, it shows an interesting and insidious aspect of modern technology marketing: you occasionally have to give away a foundation to make money indirectly. Linux is free, but you gladly pay Red Hat or Novell for support. The prophesied G-Phone OS may be free, and make cell phones even cheaper to produce, and Google will make money tangently.

Welcome to the new reality.