There is an agreement between O2 and Apple that the Iphone is not to be subsidised by the network, moreover the subsidy that would be used, is what is payed to Apple as part of the revenue sharing agreement.
I upgraded yesterday with O2 and got a free Sony Ericsson W890i, 600 mins, 1000 text, unlimited data and free broadband at home, all for £30 a month! Didn't think that was too bad!