Chris DeSalvo, one of Android's co-creators, confirmed that when they saw what Apple did with the first iPhone, the team immediately realized it has to start over.
Chris was working together with Andy Rubin at Danger, before Microsoft acquired that. Google then scooped their offshoot Android project to develop its own mobile OS, and by the time Apple announced iOS and the original iPhone in 2007, Android, it seems, had been already two years in development. What Google's Android team had concocted at the time in terms of hardware, was something more akin to BlackBerry phones, as you can see in the thumb image, rather than built for a touch-centric new mobile OS like Apple's.
By January 2007, they’d all worked sixty-to-eighty-hour weeks for fifteen months—some for more than two years—writing and testing code, negotiating software licenses, and flying all over the world to find the right parts, suppliers, and manufacturers. They had been working with prototypes for six months and had planned a launch by the end of the year . . . until Jobs took the stage to unveil the iPhone.
The Sooner project that Google has been working on so far was superior in terms of software flexibility, as it had its own web browser and Google's apps, its own app store API, and was meant to be independent of the hardware platform it will be run on, but the prototype phone itself, had nothing to do with the user-friendly iPhone.
Thus in the aftermath of the Steve Jobs announcement in 2007, Andy Rubin went on record saying "“Holy crap, I guess we’re not going to ship that phone,” referring to the Sooner project, that you can see in the slideshow below. The rest is history, and although Android was born with the launch of the G1, which still had a keyboard, that ship has irreversibly sailed nowadays, and we have Apple to thank or blame for that. “We knew that Apple was going to announce a phone. Everyone knew that. We just didn’t think it would be that good,” comments Ethan Beard, one of Android’s business development execs at the time.
It turns out that Google had a touchscreen phone prototype in the works, too, codenamed Dream, but deemed interacting with it too forward-thinking for the general public just yet, just like Nokia did, and too risky to put resources into. That notion was completely turned on its head by Steve Jobs, and Google fast-tracked the touchy-feely phone a year or so, to launch something that was a mixture of the Sooner and Dream projects, at the same time trying to implement the things Apple didn't do with the first iPhone as an added value in the G1.
Google scrapped this first Android reference device when Apple announced the iPhone