Subsidized is almost like leased--or rather, rent to own. If you look at the different rent to own companies around the US, to buy anything at all, you're paying at least twice the retail value, if not three times; a subsidized phone isn't that much different.
Remember when cell phones only cost $35 a month? How many of you are paying less than $100/month with a smart phone? Why? Cellular service should still be about $35 and for most of the more basic 'Feature Phones', it is. Data shouldn't be so grossly overpriced, no matter the network, not when the cost is divided among so many million users.
Personally, while the price of the iPhone seems high, the Android phones aren't really that much cheaper. This is why the contracts are so high--you're paying for more than the phone itself and more than the contract. You're paying for pure profit as well. While you think the Android phones are selling for less, the average contract is higher for them than for the average iPhone on AT&T.
I also want to point out that AT&T's service really isn't as bad as so many people claim--as long as you're in an area that has decent coverage, that is. AT&T's problem isn't how good or bad their service is, but rather that their 3G coverage in particular is so limited; even AT&T expressed that issue not so long ago. I can get AT&T's EDGE almost anywhere, but compared to 3G its about as good as a 28.8kbps modem on a land line.
At the moment, only Verizon has better 3G coverage, though it's slower than AT&T's and T-mobile's so-called 4G. In other words, Verizon's advantages are broader 3G with a larger user base. They feel they can handle the added user load since supposedly the Android phones haven't really stressed it yet. Verizon didn't want the iPhone under Apple's requirements originally, now they seem to want it under any conditions--as long as nobody else gets it at the same time. Personally, I believe this shows both their greed and their short-sightedness. If they get swamped with iPhone activations while T-mobile and Sprint get off scott-free, all of a sudden these other two providers will look better and surge ahead in service quality. A greedy move by Verizon could spell it's downfall just as AT&T has fallen. The winner will be the provider that can recover the quickest.