I suspect the process that assigns official contract-free prices to phones is entirely based on telco politics. The goal for telcos in the US and Canada is to lock you into a long-term contract, and high prices that no one is intended to pay help ensure that.
For example, Rogers (my wireless provider in Canada) offers a 3G USB modem for $250 without contract. I bought a near-identical prepaid modem from Vodafone in Germany this summer for 40 EUR. Or alternatively, take the iPod Touch. Apple sells the new 32GB model for $300, whereas an equivalent iPhone 4 is $700 off-contract. Does the 3G radio really add an extra $400? I think it's just there to make AT&T happy and give Apple a piece of the subscription pie. If phones weren't subsidized, the list prices would be quite different.
Does the 3G radio really add an extra $400? ... If phones weren't subsidized, the list prices would be quite different.
No doubt it does not cost an extra $400, but don't make the mistake of assuming that in the absence of long-term contracts suddenly all prices will be based solely on production cost. See software for example. Does Photoshop really cost Adobe $X00 more than Photoshop Lite? No, they're both free. Companies will charge what they can, sometimes with highly varied pricing for products of similar cost, especially when the marginal cost of production is low but the cost of R&D is high. This is the price discrimination necessary to run a successful business.
Sure. They'll charge what they can. If phones were sold at list price without a contract, they'd have a price set by the market and not solely by backroom negotiations. I'd expect a contractless iPhone 4 to run a ~$150 premium over the iPod Touch, similar to the way the 3G iPad adds about $150 to the Wifi-only iPad. Certainly not $400.
Differences between an iPhone and iPod that I can think of:
the 3G radio you mention
Compass
GPS
Gyroscope (?)
Camera (iPhone camera is far better)
Larger battery
An Aerial :)
Different manufacturing process (pressed steel back vs the iPhone design)
Then there's the cost of development and certification (worldwide) for the phone side of things which has to be amortised across iPhone sales.
Not saying it amounts to anywhere near $400 (or even a quarter of that), just that it amounts to something. There's probably a decent amount of "because we can" in the pricing too
For example, Rogers (my wireless provider in Canada) offers a 3G USB modem for $250 without contract. I bought a near-identical prepaid modem from Vodafone in Germany this summer for 40 EUR. Or alternatively, take the iPod Touch. Apple sells the new 32GB model for $300, whereas an equivalent iPhone 4 is $700 off-contract. Does the 3G radio really add an extra $400? I think it's just there to make AT&T happy and give Apple a piece of the subscription pie. If phones weren't subsidized, the list prices would be quite different.