It works like that everywhere. Here in the UK, once you've run out your contract, you can go onto a "simplicity" contract (on o2). This gives you exactly the same minutes/texts as the £35 2 year contract, but it's on a month-to-month basis, and only costs £20 a month.
That extra £15 a month goes towards paying for the phone. Buying the phone sim-free gives you the option of just having the phone and going with different networks on PAYG as and when you want to.
That's how subsidies work. The phone costs £599 (32GB). You pay a higher contract price and it will cost less, because you pay for the phone as you go along.
I don't know what about my post was confusing to you. Obviously it DOESN'T work like that everywhere. Yes, AT&T has a pay as you go plan, but only certain devices are offerd. Everyone else must have a two year contract.
"AFTER YOUR SERVICE COMMITMENT, THIS AGREEMENT SHALL AUTOMATICALLY RENEW ON A MONTH-TO-MONTH BASIS UNTIL EITHER PARTY GIVES NOTICE PURSUANT TO THE TERMINATION PROVISION BELOW."
"Either party may terminate this Agreement at any time after your Service Commitment ends with thirty (30) days notice to the other party."
If you do not sign another two year agreement, your service ends.