In view of the recent Fermi observations of GRB prompt emission spectra, we develop a theory of photosphere emission of a hybrid relativistic outflow with a hot fireball component (defined by dimensionless entropy η) and a cold Poyntingflux component (defined by magnetization σ 0 at the central engine). We consider the scenarios both without and with sub-photospheric magnetic dissipations. Based on a simplified toy model of jet dynamics, we develop two approaches: a "bottom-up" approach to predict the temperature (for a non-dissipative photosphere) and luminosity of the photosphere emission and its relative brightness for a given pair of (η, σ 0 ); and a "top-down" approach to diagnose central engine parameters (η and σ 0 ) based on the observed quasi-thermal photosphere emission properties. We show that a variety of observed GRB prompt emission spectra with different degrees of photosphere thermal emission can be reproduced by varying η and σ 0 within the non-dissipative photosphere scenario. In order to reproduce the observed spectra, the outflows of most GRBs need to have a significant σ, both at the central engine, and at the photosphere. The σ value at 10 15 cm from the central engine (a possible non-thermal emission site) is usually also greater than unity, so that internal-collision-induced magnetic reconnection and turbulence (ICMART) may be the mechanism to power the non-thermal emission. We apply our top-down approach to GRB 110721A, and find that the temporal evolution behavior of its blackbody component can be well interpreted with a time-varying (η, σ 0 ) at the central engine, instead of invoking a varying engine base size r 0 as proposed by previous authors. 6-7 orders of magnitude in energy, allowing a close investigation of various spectral components in the GRB prompt emission spectra. The first bright LAT GRB, GRB 080916C, showed nearly featureless Band spectra in 5 different time bins over 6-7 orders of magnitude in energy (Abdo et al.