ARM, the British chipmaker, has unveiled the first mobile phone to use Google’s Android mobile operating system at the Mobile World Congress in Barcelona.

The unbranded prototype features an internet browser, map software, multimedia applications, text messaging, calendar functions and email as well as a phone.

Android is backed by an alliance of more than 30 mobile phone operators, handset makers, software firms and component manufacturers. It will be distributed free to phone makers, but users will have to put up with advertising messages during calls and browsing.

ARM’s prototype uses Google.com as its home page, Gmail as its email application, and Google Maps for navigation.

The early adopting companies believe that by developing phones that are easy to use as well as attractive to the eye, they will be able to challenge the Apple iPhone, currently the market leader in non-business smartphones.

Although the Android project is at a relatively early stage, the first Google-based mobile phones are expected to go on sale later this year. Strategy Analytics, a research firm, has estimated that Android will be installed on two per cent of smartphones by December.

Estimates of the mobile advertising market put it at more than $11 billion by 2011.

As expected, Google has confirmed it will bid for the 700MHz wireless spectrum at auction in the United states.

The Sears Building on Google Earth

The bidding will place the company in competition with big telcos like AT&T and Verizon.

Investors have not taken the news with total delight, however, many worried about the projected cost of $10bn to build out a wireless network.

Google’s recent concentration on mobile telephony fits in with this latest move beyond its core business of search and online advertising.

According to the Cringely Pulpit – a weekly column on the website of public-service broadcaster PBS — Google is in bed with Apple while both companies are keeping a close eye on each other’s every move.

Google CEO Eric Schmidt says, “Google’s architectural model around broadband and services and so forth plays very well to the powerful devices and services Apple is doing. We’re a perfect back end to the problems that they’re trying to solve. And they have very good judgment on user interface and people. They don’t have this supercomputer I’m talking about, which is the data centers.”

Cringely comments, “Google handles the back end and Apple the front end. Google runs the macrocomputer while Apple supplies the microcomputer.”

But is it as simple as that? “Apple isn’t going to be satisfied making clever little interfaces to a world of information provided — and owned — by Google. … [Steve Jobs, Apple CEO] can rent a supercomputer anytime he wants one, so there.”

Moreover, “Google needs Apple on that team for its financial power, its sense of the market, and to keep Steve Jobs in a known position so he doesn’t make any trouble. But I’m also sure Steve is questioning the strategy on a daily basis and twice a month threatening to pull out of the consortium of bidders Google has assembled.”

A dance of the toreadors perhaps?

In conditions of the highest secrecy with NDAs slapped on insiders, the long-awaited GooglePhone is set to enter a crowded marketplace sometime soon after America’s Labor Day.

Thought to be an early prototype of the GooglePhone

It is being described it as “simpler” and not as flashy as Apple’s iPhone. It has the ability to scroll through icons horizontally, making a number of different features easily accessible despite the limited screen space.

Another described it as having three-dimensional, animated buttons on the screen with a small QWERTY keyboard, like a Treo or a BlackBerry, rather than relying on a touch-screen, like the iPhone.

Earlier, Sim Simeonov, a technologist-in-residence at Polaris Venture Partners in Waltham, blogged an entry titled “The Real Google Phone.” He wrote that an “inside source” had described a “BlackBerry-like, slick device,” and that “Google would create distribution partnerships with a number of different mobile carriers, unlike Apple, which is locked into AT&T for five years”.

In August, The Wall Street Journal reported that Google hopes that several different manufacturers will build the phones and multiple carriers will help distribute them. Google will supply the software and deliver ads to the phones.

Engadget wrote last week that Google’s new operating system for cellphones, could be revealed shortly after Labor Day.

We await developments with interest.