At first glance, the policy doesn't make sense: Most companies try to hang on to return customers. So why are AT&T and Apple apparently penalizing return customers -- charging people who bought last year's iPhone 3G a $200 premium to upgrade to the new iPhone 3G S?

The answer has to do with the practice of "subsidies," the standard way that cell phones get sold in the United States. It works out well for consumers, at least most of the time. It remains to be seen whether the subsidy process has broken down in the case of the iPhone 3G S, or if complaints are coming from a tiny, but vocal, minority.

Apple introduced the iPhone 3G S at its annual Worldwide Developer Conference on Monday. The device offers a processor upgrade and other hardware improvements that boost performance by double or triple previous models. The new phones now include video recording, a better still camera, and a built-in compass to improve location-based applications. The phones also have double the storage of current models. The price is $199 for 16 GB of memory, $299 for a 32-GB model -- for most users. For people who bought an iPhone 3G, the price is $200 higher.

It's The Subsidies

iPhone 3G customers aren't being singled out here; the reason for the price difference has nothing to do with whatever model of phone you're carrying around in your pocket. It's the terms of your contract that matters. AT&T and other American wireless carriers offer steep discounts, called "subsidies," for new handsets, but only to people who sign service contracts.

And, for customers who already have service contracts with AT&T, discounts on new hardware are only available near the end of the contract cycle. The iPhone 3G came out a year ago, so owners of that device have at least a year left on their two-year contracts. This isn't an issue for first-generation iPhone users; their two-year contracts on the devices, introduced in summer 2007, are running out.

And of course, it's also not an issue for new iPhone buyers; they don't have AT&T contracts to worry about.

The discounts are called "subsidies" because AT&T -- like other American wireless carriers -- buys the handsets from Apple, and pays significantly more for them than it charges customers. AT&T makes money by signing you up for a two-year contract, and recouping the cost and making a profit over the life of the contract.