Interesting comment by Google. If mobile ads will lead to free phones, why has successful advertising models not led to free PCs or TV sets. Strange extrapolition if you ask me.
Yes, phone are getting cheaper yet the more you need on your phone (f you go for Smartphone or for pocketPC phones the more expensive it gets). The CEO of Orange was in the Valley recently and he commented that they found consumers don;t want cheap phones even in developing countries. The cheap $20 phones being promised are not as successful as expected.
Secondly, I would say as phone become the 3rd screen and personal, I really don;t see how people will like to be bombarded by ads in exchange for free phones or free calls.
As it is, I live also in Asia where phones are subsidised by the phone companies (often I pay $0 or $50 for a good phone) and many users had complain to their regulators about being spammed even by their own phone companies through SMS.
Sure it will be interesting to see if and when mobile advertising will play a role e.g. reducing costs of calls, help increase ARPU for mobile operators or enable adding on free or cheap Wi-fi over mobile phones in addition to GSM, 3G etc..but that again is a different story.