First off, I'm afraid I don't understand what a phone subsidy is, perhaps we don't have them in the UK or I've never seen them on a price plan here.
Assuming it's something you pay for owning a smartphone, would it still be there for a smartphone that costs nothing? If so, then the extra cost for the iPhone is still $49.
The comparison ought to be an iPhone v another smartphone and contract with comparable features, not an iPhone v not buying a phone at all.
In the US most phones are bundled with a service contract (typically two years). This reduces the line item price of the phone from list price to a fraction of list price (or zero). However, if the contract is terminated early, the balance of the list price is due. In addition, if a smartphone is bundled with the service contract, the purchaser must select a plan which includes data service.
ATT makes additional revenue by charging the same rate if you have bundled a phone with your service plan or if you are using your own unlocked GSM phone.
Tmobile, the other significant GSM carrier in the US provides a $20 a month discount for (and does not require a service contract) when the customer does not bundle a phone with their plan.
In the US ATT is the exclusive iPhone carrier and unlocked GSM iPhones are not available. Thus the price of the iPhone is $49, and it's cost over the course of a 24 month contract is $899 because of the terms required by ATT's standard agreement.
But any cheaper phone is still useless without a contract anyway? The difference isn't $899, it's $899 minus the cost of ownership of an equivalent phone. Even a free phone on a 2 year basic contract is going to be around $600-700, surely?
There are pay as you go options, but other than the lightest of users, I don't know many people who find it cheaper than a contract, especially if they use any data.
Assuming it's something you pay for owning a smartphone, would it still be there for a smartphone that costs nothing? If so, then the extra cost for the iPhone is still $49.
The comparison ought to be an iPhone v another smartphone and contract with comparable features, not an iPhone v not buying a phone at all.