As an owner of the first generation iPhone, I have not been all that close to the "controversy" those who have an iPhone 3G have found them in. To sum up, because AT&T subsidized the purchase of these phones, they need customers to keep their existing phones for a significant portion of their contract time to recoup the investment that is the subsidy. Those who have had their iPhones for less than a year are being asked to pay high fees, basically to offset the cost AT&T incurs with the subsidy.
 
There's a lot going on here.
 
First, customers knew the phone was subsidized and there is information in the contracts about early upgrade fees, cancellation fees, etc. I don't have a ton of sympathy. That is, unfortunately, how the mobile phone world works. This does, however, highlight a few things regarding the iPhone, AT&T, competition, and the mobile phone industry (at least in the US).
 
Let's start with the industry. No scientific research here, but it seems like most cellular contracts last two years (24 months). The average subscriber in the US replaces their phone every 14-18 months. Is it a coincidence that the contract term is longer than the amount of time the user keeps their phone? No. Is it a coincidence that, in order to get a new phone at a subsidized price, you have to sign a new two year contract? No. This is by design to prevent churn. Basically, you want that latest and greatest phone at an affordable price. The phone companies gives it to you at that price, but at a cost both to them and to you. Their cost is the subsidy. Your cost is the contractual obligation to pay off the subsidy. When you want to upgrade before your contract is up, they get to charge you for the privilege and, they get you obligated for another two years of contract. Win-win for them. Not so much for you.
 
In the case of AT&T and the iPhone, there is no competition among carriers in the United States, so AT&T can mostly do as it pleases in this area. Right now, this is causing problems for AT&T's customers. However, we also know that sometime in the next few years, AT&T's exclusive arrangement with Apple will come to an end. In theory, this means competition in the US marketplace for iPhone customers.
 
Ironically, I just, while I was typing the previous paragraph, received an automated customer feedback call from AT&T regarding my recent visit to one of their stores. I told them roughly what I'm saying here, though I really only had 45 seconds to do so.
 
In the past, there have been a few people who chose their carrier based on the phone. The iPhone has changed that. There are now millions of people who have chosen a carrier because of the iPhone. What AT&T doesn't realize (and I bet Apple does) is that those customers aren't AT&T customers, they are iPhone customers. Their loyalty is to the device, not to the service provider.
 
More than that, many of those customers are already not happy with their (lack of) choice of providers. I know very few iPhone owners who are truly happy with AT&T as their provider. Many of them have expressed a desire to have a different carrier, or at least a choice of carriers.
 
I believe Apple chose a single carrier for a few reasons. In part, they sought a single partner to work with (in each country) in order to concentrate on the user experience with the device. By working with a few partners, they were able to get the features they wanted like Visual Voicemail in place. They also were able to get the providers to be a little more flexible because the device was clearly going to be a bit.
 
I also believe that Apple knew they would be generating millions of iPhone customers, not carrier customers. I don't think AT&T saw this.
 
Now, AT&T is letting those already disgruntled customers down even more. MMS and tethering will not be available at the launch of the iPhone OS 3.0 or iPhone 3GS. What's more, Apple pointed this fact out in a rather public fashion at WWDC. Scott Forstall did a good job of not reacting to the crowd's reaction, I believe the crowd's reaction was his goal. Apple wants to apply pressure to AT&T to be a better partner, especially if it wants to extend its exclusive relationship with Apple.
 
AT&T is going to have to do a lot of work to repair or build relationships with those disgruntled customers and they don't have a lot of time to do it. The details of the exclusive arrangement are shrouded in mystery, but it is rumored that AT&T has been seeking an extension to the contract. If exclusivity ends and AT&T has not built those relationships, they will rapidly bleed those customers they are currently so chuffed at having attracted. You never know, maybe the two year contracts people are signing now in order to get an iPhone 3GS will end after exclusivity does.
 
Basically, Apple has done to AT&T with the iPhone what it did to the music industry with iTunes. In the case of the iPhone, the balance of power has shifted away from the carrier to the handset maker. I think it took them by surprise.
 
Now, if I were another carrier, say T-Mobile who already has the iPhone in Germany, here is what I would do in anticipation of the day that all those iPhone customers on AT&T are released from their captivity:

• Get the Visual Voicemail software and other iPhone related systems (billing systems, servers, Internet infrastructure, etc.) in place now. Exclusivity will end someday.
• Offer to pay the contract termination fees of existing iPhone customers.
• Offer an iPhone maintenance plan. We know Apple will refresh the iPhone yearly around June. Have a plan that tacks $20 (or some other reasonable amount of money) on the monthly bill. When Apple ships the new phone each year, automatically send one to your customers. Don't forget to include a box so they can send their old one back for recycling or refurbishment.
• Offer a damaged iPhone replacement service for a small fee per month.
• Don't nickel and dime us. Include text messaging, preferably unlimited, in your base plans.
• The iPhone has changed the mobile phone landscape. Be as innovative as a service provider as the iPhone is as a device.

AT&T has a long way to go in order to keep iPhone customers.