The iPhone 5 doesn't really cost $199. It costs $649. Your carrier is eating the difference, in exchange for a two-year contract. With that two-year contract, you can't switch carriers, because 1) you've signed a contract, which will cost you a fee if you want to break it, and 2) your phone has been "locked" to your carrier. (This is done by the manufacturer; it's a software lock, so it can be unlocked, but it's not easy to do.) That reduces competition between the carriers; people often stick with their carriers for years and years, because you only get one chance to switch every other year, and your old phone won't work with your new carrier anyway. That means that it also encourages you to throw your phone away and get a new one every two years. After all, you're paying $80 or $100 a month for this plan--why not spring for a new one if it's being offered, since it's subsidized to be only another $199?