Excellent piece from Horace Dediu on just why the iPhone commands so high of a price, relative to alternatives. The short answer is that it is highly subsidized by operators because the iPhone is exceptionally gifted at moving users to higher data consumption and hence higher monthly fees. Remember all those studies that show iPhone usage way ahead of Android? This is the key here: iPhone users use their devices extensively for things that require data and carriers sell data.
Looking at it from this point of view, it is perhaps quite clear why Apple chose to stay so close to its current strategy. Yes, Android can field extremely cheap phones. Yes, Android can pick up a lot of market share and users. But what it hasn’t been shown to do, yet, is increase the ARPU for the carrier, and that is the key differentiation. Apple isn’t having the fight directly at the point of sale, they are having the fight at what people actually do with the device once they’ve left the store. And they feel their advantage there is still quite unmatched.