The idea is that the jerkwad phone companies are the ones that set the exorbitant prices (not manufacturers) for their crappy little phones, and then they will pay for the "expensive" handset, as long as you sign your soul to them for two years. Of course, they're not really paying Nokia or LG or anyone the "list price" -- they just made whatever astronomically high number they wanted, so it seems like you're getting a real bargain when you sign up with them. The phones themselves cost practically nothing to produce, with minimal R&D.
So, the trick is this: Nokia makes a $20 phone (that is, it costs $20 to manufacture). AT&T advises Nokia that the phone is worth $100. Nokia sets the price at $100. AT&T will offer to GIVE you the phone, if you sign up with AT&T. AT&T pays Nokia maybe something like $30 for the phone. You think you've saved $100. Your first monthly bill is $80, of which $49 is profit for AT&T, after they paid Nokia. Each subsequent bill is $79 of pure profit.
The difference with iPhone (and the reason that AT&T isn't giving them out if you sign up) is that 1) Apple set the price, not AT&T; 2) Apple actually expects to get $400 for every iPhone they sell (minus whatever percentage for phones sold in AT&T stores); and 3) The iPhone actually is a $400 phone. That is to say, the cost to research, develop, manufacture, and garner a (reasonable) profit makes $400 a sensible price -- no "wiggle room" for AT&T.
