The d6 move is the "Fischer Variation" proposed by the late great world champion Bobby Fischer, himself. He called it a "high class waiting move." Yes d5 is playable and transposes into the Falkbeer Counter Gambit and/or the Scandinavian Defense. You are right about the fianchetto, it is a mistake in the King's Gambit as this game shows. This is a game that I played, I was trying to mate Black's King--which is what we usually try to do in the KGA--when it came to me that I could trap the Queen.  

i don't know the theory, and i'd like to hear your thoughs on that, but i think that d6 is too humble for black (is d5 playable?), and definitely fianchettoing is way to slow. As you have demonstrated quite clearly.