I've sold both old iPhones to buy the latest model on launch day. This is how it works.
Sell the old iPhone, wipe the info, take out my SIM. It's now the buyer's phone. They don't have to sign a long-term contract with AT&T (or T-Mobile if it's unlocked; I've sold both locked and unlocked), so they're paying more than the subsidized price for the privilege.I take stellar care of my belongings, so they're getting a pristine 12 month old iPhone for between subsidized and full retail price. All they have to do it insert their SIM and activate it. Their plan is between them and their carrier. As soon as I wipe and remove my SIM, I'm out of that equation.
I don't terminate my AT&T contract when I get the new subsidy (or, as in last year's case, partial subsidy), I'm extending it. Like this year, my contract would go until June of 2011, but I'm pushing the reset button, so to speak, and am signing another two-year contract starting this month, to take advantage of the $199/299 price points. So instead of the contract ending 6/2011, it'll end 6/2012. Because I'm not terminating the contract, I don't owe any ETFs.
I've been doing the same thing for probably 8 years now, first with Verizon, then with AT&T.
I'm selling the 32gb white 3GS for $425, and paying $299 for the iPhone 4.
Get it?
Beautifully explained. I think the missing link for me was the removal of the sim card. Duh (right?) I know it's there, but I just don't think about it because it's out of sight. That would explain how folks are able to sell older hardware at a small profit for new hardware on contract.