It's very simple: they partnered with AT&T (nee Cingular).
Here's what happens -- and this is not novel because this is what happens with all hot mobile phones -- you buy the iPhone on June 29, you have a nifty device that no one else has. You feel cool and special for a few weeks or months as everyone checks it out. Then more devices start coming out that make the iPhone a little less sexy, or there are just so many iPhones out there that it's not cool anymore (like RAZR). And what do you have at that point?
What you have is you're still stuck with AT&T.
AT&T is easily America's worst wireless provider. You can find that out by asking people, but I don't need any opinions to back that up, all I need are some numbers:
SBC purchased AT&T Wireless for $41b in 2004. Then SBC purchased both AT&T and BellSouth for $16b and $86b respectively.
Since they have to recoup that money from somewhere, AT&T does not have the financial resources to spend lavishly on network upgrades. This should be more than obvious with their fits and starts of getting to 3G. WCDMA was launched in San Francisco by AT&T wireless in 2004. It hasn't made it very far since. And this isn't historically different than what they've done before. After buying out PacBell Wireless, Cingular notoriously let their network lag in California to the point where they were hit with a class action lawsuit.
If that wasn't enough, ever since the Cingular merger made them the nation's largest mobile carrier, Verizon has been gaining fast without acquisition. Verizon finally blew past AT&T/Cingular in April and now has more subscribers. What does that tell you about the public image of Cingular?
After all of these mergers and Verizon catching up, it's obvious that AT&T had to bend to any of Apple's demands in order to carry the iPhone and boost cash flow. AT&T is reportedly giving Apple a share of subscription revenue, which is completely unheard of in the wireless business. Other carriers approached by Apple didn't need Apple the same way AT&T did. Verizon told Apple to get lost, and now other international carriers are doing the same thing.
So what does this mean to you, the iPhone owner? Let me give you an example.
Let's say you had a choice between a Mac with a 1200 baud modem and a PC with a 2400 baud modem in 1989. You'd probably go with the Mac because, at that time, Macs were a better designed computer to use and the modem mattered less. The world wide web wasn't around in 1989 and people didn't rely on network connectivity. But today, if you only had the choice between a 56K modem and an ethernet port, you'd choose the one with the ethernet port, right?
Now decide if you want to use an internet device that has a download speed of up to 474 Kbit/s, or one that's up to 2 Mbit/s. The former is the iPhone on AT&T's EDGE network. The latter is any one of hundreds of devices on Verizon or Sprint and EV-DO. If your goal is getting to data from your phone, does the Apple-ness of device matter less to you when there's such a dramatic speed difference?
(Also, if you've tried both EDGE/HSDPA and EV-DO, there is also a significant difference in latency. Though I don't have stats for that).
Ok, let's say that makes no difference to you right now. So let's flash forward 18 months. You're still under contract with your iPhone and AT&T. Will AT&T have been able to build out a 3G network that is faster than what Sprint and Verizon will have available in two years? Verizon might be starting towards EV-DO Rev. B, which is 14.7 Mbit/s max, and Sprint will had deployed WiMax is several markets. WiMax will have downlink speeds of up to 70 Mbit/s.
Overall, for you, buying an iPhone means you're signing up with a suckier network using suckier technology. And to boot, that's where most of the iPhone cost will go. The iPhone might cost you $600 now, but you'll be paying at least $1200 over the next two years to Cingular.
Apple partnered with a company that can't deliver the goods they need--bandwidth--and this is going to reflect badly on their product. Do you think people out there will think the iPhone is slow, or the network is slow? When the iPhone is only available on AT&T, does it matter?
Apple wants to make mobile data providers into simple ISPs. That's a noble challenge because mobile providers desperately want to be value-add services, like games and such. Their strategy has been working: the providers hold all of the cards. Now that Apple has gotten one provider to accept their product -- one that might actually make their product look worse than it is because of poor network performance -- I'm not sure that makes it easier for them. If the main complaint about the iPhone turns out to be AT&T's service, they're going to have a tough, tough time finding a Vodafone, T-Mobile, Orange, Telefonica or Verizon who will kneel to their same demands when they want to roll out elsewhere.