@mobiledivide: That would make the iPhones cost $599 and $699 (4gb & 8gb). I really doubt they would get anywhere close to the number of their current users selling at that price levels. Remember how crappy the first iphone was? No AppStore, no Cut\Copy\Paste, just the build in apps and a good browser.

Even on their current iteration, with all the new features, access to the very popular appstore, the unlocked prices of $599 and $699 (16gb & 32gb) are still very high for many.

Bundling the phone with carriers contract act as a financing programme, and AFAIK a financing option always opens up your product to more potential customers.