I think the only real problem here is that the phone is subsidized. Plain and simple.
Frankly if an iPod Touch @ 32GB is 299.99, then the addition of the Cell radio shouldnt jump the cost to $599.
If an iPhone was treated like any other apple product then we would all welcome a newer version within 8 months, but due to the "contract" style of the Cellular business model, we are trapped without spending $600+ to get a new device.
Think of it in terms of the iPad. 16GB is $499 wifi only. If i want 3G also, its an additional $129. So for $629 I have an iPad with 3G and it isnt subsidized. So why can't an iPod Touch 32GB be $299 and an iPhone 32GB for $429 non-subsidized. Remove the providers altogether like they did with the iPad. Just buy it and add it to your account. I still have a 2 Year Contract with my provider and they can still charge me an ETF if i cancel before hand, just like DirecTV or Centurylink does without blaming it on the cost of the equipment, because i dont get to keep my Satellite receiver or Cable Modem, they still need to be returned.
Apple has the right idea with the 4S having one sku operate on any available supported provider. Now they just need to break away from Provider pricing and sell the phone as they do any iPod or iPad.
Clearly the $599 sticker price is mearly an inflated scare tactic to get people to sign contracts. It has nothing to do with any reasonable percentage based markup over cost. Its even far beyond the "Apple Tax".
When the first iPhone came out. I paid $599 for mine but it was unsubsidized. Then when they started selling Refurbs they were offering them for $199-$399 unsubsidized. A Perfect Price point if you ask me.
People balk at the idea of spending $300+ for an phone because all you see is $.99 and free offers for crap phones. But if you are willing to spend $199 or more on an iPod, why would you flip out about paying that for a phone that has the same features as the ipod? After all, isnt that essentially the business model of the iPad with the 3G only adding $129 to the cost of the device.
I just dont see why it has come to be that a Cell phone is this extremely special device that needs to cost half a grand.