I should have put this into my post yesterday about the Top 5 Reasons I'm SO Upgrading to the iPhone 3G, but it didn't completely sink in until just now that this was really an issue for some people. It was that off my radar -- but I guess it shouldn't have been, given this is the blogsphere.
DaringFireball did the math and figured that, even if the iPhone 3G costs some $200 less upfront than it's 2G ancestor, due to AT&T charging $10 more per month for 3G data, and potentially $5 more for SMS, that works out to $240 or $360 more over the course of the mandatory 2 year (24 month) contract, and ends up making the overall TCO (Total Cost of Ownership/Operation) some $40 to $160 more for the iPhone 3G than the previous generation model.
But here's the thing. TCO is only one buzz acronym. Another is ROI -- Return on Investment. No cell phone at all is cheaper than the iPhone, but what functionality do you give up by not having a mobile device? Dial-up (analogous to 2.5/2.75G EDGE service) is cheaper than broadband (analogous to 3G HSPDA service), but what amount of productivity (not to mention patience!) do you lose to the slower speed? Cell/Wi-Fi "triangulation" is included in the old iPhone, and thus cheaper than the A-GPS in the iPhone 3G, but what features -- including new App Store apps -- will you lose out on by not having precise location services?
There will always be cheaper. You can probably pick up a great deal on a 486 running Windows 3.1 if you look hard enough. But cheaper is not always better. If it was, that Internet University that keeps spamming everyone would look better on a CV than Harvard, Starbucks would have gone broke long ago, and a Yaris would smoke the Reventon on a straight away!
In the end, you typically get what you pay for, and new usually costs more than old (until newer comes along and continues the cycle). AT&T (and other carriers) are no doubt subsidizing the heck out of the iPhone 3G, and are making that money back via the service plans. That's their business. Our business is deciding whether the handset that comes with that service is worth what they're asking for it.
$40 over 2 years for an iPhone 3G? For that investment you get a 3G speed and A-GPS location services (not to mention a flush headphone jack!) return.
TCO be d@mned, that's a pretty compelling ROI.