Dear Aunt TUAW,
I wanted to get a cheap iPhone plan for my dad but your write-up says that I can't use my first generation iPhone with AT&T's Pay As You Go. I'm going to need a 3G or newer unit.
So what's my best bet for scoring an inexpensive out-of-contract iPhone? I looked at eBay and everything there is unlocked and expensive!
Your loving nephew,
Unfortunately, the used iPhone market is hotter that Auntie's collection of vintage Big Band LPs, all because of those unlocked units. Websites like gazelle.com snatch up used models for resale.
Auntie thinks Apple's move into the unlocked market will slow down that demand. Currently US$649 (and likely to drop in a few months), the unlocked iPhone 4 offers something that homebrew unlocked models have been unable to match: the ability to upgrade on demand without destroying the unlock.
Until that slowdown materializes, though, the used market remains quite expensive. Your best bet is to ask around to find friends and colleagues who might be willing to sell or give you an older model that's no longer being used.
If that doesn't pan out, Auntie suggests contacting your local Apple authorized service provider (ASP). They sometimes receive broken units as trade-ins for other work done -- almost always due to broken glass. It costs about $80 to replace the glass on an iPhone 3G, more (about $130) if the LCD breaks as well. Those costs prompt some people to barter their phone rather than repair it.
Since a large part of that cost is labor, ASPs can absorb the screen replacement work and resell units at a lower price than you might find elsewhere. Your best bet is to call around with a wishlist, leaving your name and contact information, and then be prepared to wait.
Auntie talked to ex-TUAW-ian Josh Carr, who works as an ASP at MacWorks in Denver. He told her that while they do get units with broken components that they fix and turn around, it doesn't happen on any regular basis. He always has a wait list.
As a final option, if you don't mind spending, you can buy a refurbished 3GS for under $400. You pay AT&T $9 on their current refurb special, sign up for a 2 year contract, and then cancel in the first month, paying a prorated amount for the month and $325 for the contract cancellation. It's an awfully expensive way to do things (remember the $175 cancellation fee from a few years ago?) but it's one more option in your arsenal.