I heard there was a law that prohibited them from charging for updates on iPhones in use...
First of all, let's get one thing absolutely straight: Apple could have decided that they wanted to charge everybody for all major iOS upgrades, if they had thought that it would have been in their best business interests to do so. There is no law that would have
prohibited them from doing that.
Of course, doing so would have slowed uptake of newer versions of the OS, creating an unduly fractured ecosystem which would have harmed their attempts to roll out their App Store infrastructure. So that option was out of the question.
but it was okay to charge for iPod touches and iPads.
On the contrary, there was (and still is) a law, Sarbanes-Oxley, which, when taken in conjunction with "generally accepted accounting practices", would have
supposedly prohibited Apple from giving away the major iOS upgrades for free to the iPod touch -- even though it was okay to give away the upgrades for the iPhone.
This distinction was not because of any inherent property of the device itself that differed from the iPhone. Rather, it was because of the bookkeeping method that Apple used to use to account for the money they made from purchases of the iPod touch versus the method that Apple used to account for purchases of iPhones.
Apple used to account for all the money from the purchase of an iPod touch all at once, and so according to Sarbanes-Oxley, the product sold must have reached its final and permanent condition at the instant they received their money. Bug fixes to repair broken feature that were already present in the software would be OK to give away for free, but any new substantial changes to the product, such as adding major new software features, supposedly would have to be accompanied by a separate sale.
Apple used to spread out the money it received for the sale of an iPhone in equal installments over the course of 2 years. And so, according to Sarbanes-Oxley, the product didn't have to reach its final and permanent condition until after the end of that 2 year period. In the mean time, Apple would be free to give away new substantial features if it so chose.
Apple has always taken the same approach for the Apple TV and for the iPad as it did for the iPhone.
See the first three paragraphs of page 22 of Apple's most recent quarterly report for corroborating points on all these assertions:
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NzgwODJ8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
Beginning in June 2010, generally accepted accounting practices changed, so that, instead of dividing up the whole purchase price in equal installments over 2 years, Apple was able to recognize
most of the purchase price all at once, and only set aside a small portion of it to be recognized over the course of the following 2 years to account for future new features. So a greater percentage of the iPhone purchase price can go on Apple's books right away, but some is still set aside to account for future upgrades.
At the same time as the GAAP guidelines changed, Apple also started treating new sales of iPod touches in the same way as it had always been treating iPhones - holding a small percentage of the original purchase price back over the course of 2 years to account for future upgrades.
So now, because of this new change to Apple's accounting procedure, Apple is permitted to give away major upgrades to the iPod touch in the same way that it has always been permitted to give away free upgrades to the iPhone.