i think that the PAYG offering from O2 will be dropped in price - at£400 ($800) it is too expensive at the moment.
I can see it dropping by perhaps as much as £100 in time for the xmas rush
if they are making money on the most basic contract iphone (£99 for 8Gb + 18*£30 = £639 (and you need to assume they are making money on that) then over the same lifecycle the PAYG has room for a cut - O2 will receive revenue from the PAYG unit regardless i mean, it' not like you can unlockit and use it on Voda so their investment (subsidy - if there is one at £349!) is protected anyway.
just my thoughts