It’s probably an overstatement to say that we have now gotten our first look at the long-awaited Nexus S smartphone from Google Inc. (NASDAQ: GOOG). The new phone, introduced a mobile device conference in San Francisco, uses version 2.3 of Google’s Android operating system, and will be sold at Best Buy Inc. (NYSE: BBY) for $529 for the unlocked version and by T-Mobile for $199 with a contract.

Google and Samsung have worked together to put the hardware and software together for the Nexus S, but other handset makers are expected to climb onboard as well. The Android OS has already passed the Apple Inc.’s (NASDAQ: AAPL) iOS in shipments and is taking dead aim at both Research in Motion Ltd. (NASDAQ: RIMM) and Nokia Corp. (NYSE: NOK).

Google also demonstrated a tablet device from Motorola Inc. (NYSE: MOT) at the conference. The tablet uses a different version of the Android OS, code-named Honeycomb, which the company says has been adapted especially for tablets. Google’s spokesman didn’t offer many specifics about the device, but did note that the tablet uses a dual-core graphics chip from Nvidia Corp. (NASDAQ: NVDA). If the Android-based tablet is a marketplace winner, Nvidia could have found its place in a fast-growing and enormous potential market.

The more interesting news, though, is not about new hardware and software. It’s about money. To be precise, its about mobile advertising dollars and which company is getting them.

Both Google and Apple have purchased mobile ad networks in the past year. The ad networks are important potential revenue streams, especially for Google, which gives away its Android OS and doesn’t sell any hardware.

According to research firm IDC, Google now claims 59% of the $877 million spent on mobile advertising in the US in 2010. The IDC report, cited by Bloomberg Businessweek, estimates that Apple will get less than 10% of the mobile ad market in 2010.

Now even 100% of $877 million is not going to move the needle much on either Google or Apple revenues. But that is more than double the $368 million mobile ad market in 2009, and IDC expects the ad market to more than double again in 2011, to $2 billion.

This is what all the fuss over Android is about. As the Google smartphone OS continues to garner market share, the company’s ad network tags along. Google absolutely dominates the search engine ad market and, according to IDC’s estimate, also gets 19% of the display market. Apple captures 18.8% of the display market, but has no search engine revenue.

Even though Google and Apple are virtually tied for display ads now, as Android OS continues to gain share, so does Google’s penetration of the display market. IDC analyst Karsten Weide put the issue this way on The Wall Street Journal’s All Things Digital blog: “More [Android] devices means more mobile Internet traffic, means more ad inventory that can be sold to advertisers, means more revenue.” That about sums it up.

Paul Ausick

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