$500 with a required contract is a subsidised device; it doesn't really matter how you phrase it. AT&T paid for it to be exclusive and the retail price would have been set taking that into account. If it wasn't there'd be no reason for Apple to allow a carrier exclusive with a required contract - the buyer would own the device.

The original iPhone was unsubsidized and it was GSM only, so there wasn't an option to offer it on Sprint and Verizon then. The 4 Gb iPhone was $499 and the 8Gb one was $599. Because Apple was new to phones, they only wanted to deal with one carrier initially.

Back then, you could get a Treo or a Blackberry for less than half as much, as they were subsidized by the carriers.

And because paying that much for a phone at that time impeded sales, Apple discontinued the 4 Gb model and dropped the price of the 8 Gb model to $399 two months after it was released. They also "gave in" to the subsidy model, since that was the standard practice: https://en.wikipedia.org/wiki/IPhone_(1st_generation)#Releas...