The ETF ($175) is so they can recapture the "discount" given on subsidized phones. You walk in and they give you a Razr for free, they are really giving you it for payments included in your 2-year contract (or $175 if you cancel).
The way I understand the iPhone works (or doesn't) is that there are two different "states" to it:
Unactivated --> right out of the box, basically does nothing but stare you in the face saying "Thank you for choosing Apple, please connect to iTunes and sign 2-year contract with AT&T, blah, blah"
Activated --> has been connected to iTunes, activated by someone, 2-year contact signed, basically flipping a software switch inside the device enabling features such as WIFI, iPod features, EDGE network features if still connected to appropriate AT&T wireless plan, phone features if still connected to appropriate AT&T wireless plan, etc.
What I'm hearing from all the helpful people on this thread is that if I take this "activated" iPhone into the store, one that works fine as an iPod, one that works on WIFI, but doesn't have any raising the bar icons in the upper left corner, and tell them that I want to replace my Razr on my current (and no contract time remaining plan), they won't do it. The phone is already freaking activated, there is no UNACTIVATION! All I'm needing is a iPhone SIM reprogrammed with my account info and number. The phone doesn't care, it has already been properly activated, Apple has already received their cut of the profits from the first guy...