Apparently it's not (though I concede it often is like that). From the linked article...

UPDATE So this is what AT&T tells us:

An iPhone 3G customer in most cases can early upgrade at $399 [16GB] or $499 [32GB].

You’ll note that that’s still several hundred dollars more than what Joe Smoe would have to pay, right off the street, if he doesn’t already have an AT&T account.

No, Joe Shmoe is "paying" more than $299 for the phone; he's just paying over the long haul, with a new contract commitment to AT&T. AT&T already has your contract commitment. You have nothing to offer them but cash.

I am at the end of my AT&T contract (non-iPhone), and their website wants to charge me more for a new phone than new customers would pay. Unfortunately for them, I am just going to transfer my number to T-Mobile when the G2 comes out. Fuck AT&T. (And if T-Mobile pulls this on me, there is still Sprint and Verizon.)

No it's not the case actually. I upgraded from my 2G to 3G without any penalty. With the iPhone, which is what we're talking about here, that's not the way it works or should work. Also keep in mind, the 3G[s] isn't a huge leap.

The 2G to 3G was without penalty because the 2G devices were unsubsidized.

You can say that again, I paid a pretty penny for my 2G which is why I ignored the 3G. Glad I waited... 2G was good to me though, never had a drop call.

Very valid point. It's still pretty screwy to play: don't subsidize, subsidize, don't subsidize.

I don't understand. The phone costs what it costs. Would you rather AT&T didn't subsidize? I'm happy that they did for me.

The party that seems to actually be dishonest here is Apple, since the true price of their phone is nothing like what they put in the Keynote slide.