How To Get an iPhone 3G for $199 Without a Contract

I've compiled a how-to guide that works the system, and will net you an iPhone 3G on July 11 for about $199, and leave you without any contract at the end of it all.

The process only requires that you (or someone you can borrow) does not have active service with AT&T. Want to know the steps? Read more to find out.

Update: The links have been updated to take advantage of a $50 coupon that AT&T is offering on PDA Phones. The process is the same as before, but now, the deal is even better than ever!

First, why would you want to do this?

Several reasons, really.

One, you may be an iPhone hacker, looking to get an iPhone 3G that isn’t tied to contract. This is the cheapest way to do that, by a good few hundred dollars.

Two, if you have an original iPhone under contract, using this method nets you an iPhone 3G without a contract reset.

Three, you may want to buy one for use on another carrier. While iPhone 3G will undoubtedly be locked to AT&T at launch, hackers will undoubtedly begin working to unlock the device for use on other carriers.

Four, you may be on AT&T prepaid service. While we can’t guarantee that iPhone 3G will work on GoPhone plans, there is evidence to indicate that it will.

Five, you want an iPod touch that just happens to be the latest cell phone as well. It’s just as cheap, and leaves the door open for you to sign up for service later.

Here is what you need for this process:

1) Someone without an active AT&T account.
2) A first-generation iPhone. It can be used.

See, as a part of Apple’s re-negotiations with AT&T, they put in one requirement; anyone with an iPhone on their account, is entitled to upgrade to the new iPhone 3G as if they were a new customer. We are going to exploit this as a loophole.

Step 1: Setting up a new account with AT&T.

The first step is to sign up as a new customer, but not with an iPhone. Instead, you need to order online using this link (which takes you to AT&T’s online store) and get a phone without any mail-in rebates. We stress that you should use the above link and not order from a third-party store, for reasons that will complicate this guide (but trust us, order direct using the above link).

Update: Now you really, really need to use this link. It gives you a $50 discount when ordering.

I suggest buying a refurbished AT&T Tilt as your phone of choice. This is a good phone because it is heavily discounted, and there aren’t any rebates. More on this later.

When your phone arrives, set it up with the new service plan that is bundled with the phone. Make a test call.

Step 2: Activating the first-generation iPhone.

Now, you’re going to take the first-generation iPhone and activate it.

(If this is a used iPhone, then go to your nearest AT&T store and ask for a new SIM card (they’re free). Insert the new SIM card into your iPhone.)

Next, connect the iPhone to iTunes. Follow the iTunes activation process, and be sure to chose the option to upgrade from your existing phone. iTunes will then transfer service from the phone you received from AT&T… to the particular iPhone.

Step 3: Buy the iPhone 3G.

Now, by activating the first-generation iPhone on your account, that makes you upgrade-eligible for iPhone 3G. Upon July 11, you simply need to wait in line, flash your iPhone to the store representatives, and walk out the door with iPhone 3G for $199 (or $299 if you chose the 16 GB iPhone).

Step 4: Cancel service. (Optional).

For this, you will have to wait exactly 30 days. On the end of the last day of the first month, call AT&T and tell them you wish to cancel service. It may be best to do this after the local AT&T store closes in your area.

Why? Because AT&T has imposed a requirement that you return your iPhone within the first 30 days, if you wish to cancel service. So, we simply wait until it’s not possible to return the iPhone 3G on the 30th day. This prevents you from paying for a second month of service.

You will have to pay a $170 early termination fee ($175 less $5 pro-rated for the first month).

Step 5: eBay the first AT&T phone, and the iPhone. (Also optional).

Remember that phone that we bought from AT&T, before activating the first-gen iPhone? Well, to recover the cost of the early termination fee, and one month of service… we’re going to sell that first phone.

Now it starts to make sense why we suggested the HTC Tilt. First, it’s cheap. Second, it’s popular. And, third… it’s easy to unlock! Unlocking a phone easily adds $50 to $100 to the cost of a device like the Tilt, so being able to do it easily is just a free bonus.

Also the lack of a mail-in rebate means you don’t have to hold onto the device for six months to get part of your money back.

Finally, you can eBay the first-generation iPhone. Unlocking that as well will increase its eBay value.

The result? The “profit” in selling the two under-contract devices for a no-contract price on eBay will cancel out the ETF and the first month of service. Of course, based on eBay prices, which are variable… I can’t say with certainty that you will wind up with a net cost of $199 for iPhone 3G. However, it should come close.

Here’s the math, in case you’re wondering:

AT&T Tilt Refurb price with 2-year contract: -$99
Activation Fee: -$36
One month of service: -$70
Early Termination Fee: -$170
iPhone 3G 8 GB: -$199
Total Costs: -$574

eBay value of AT&T Tilt Unlocked: ~$380

$574 - $380 = $194… that’s less than the price for an iPhone 3G, and you now have no contract. You can then sell the iPhone 3G, or activate it on another line of service.

And, of course, there is one more thing.

I do caution that while this is kosher with AT&T policy, this guide will probably become very popular, very fast. It is possible that AT&T will impose a limit as of today on iPhone owners to establish service, and be able to buy an iPhone 3G at $199/$299.

It is unlikely however, that AT&T will make such an announcement retroactive. So, sign up for service today and hurry up! It’s not likely that AT&T will allow this deal to continue for folks that activate iPhone after the 11th.

But, what about?

The most common feedback I received in testing about this guide was the following: “How am I going to do this with my iPhone that is already under contract with AT&T?”

Simple. Have someone else establish service with AT&T. You put your iPhone on their account, and they then upgrade from Tilt, to iPhone, to iPhone 3G. Legally speaking, you’re giving your iPhone to someone else for a week, and putting your existing AT&T account on another device (like, that super-cheap phone your friend just got from AT&T).

I'm not here to debate the ethics of this procedure, I just figured it out, put it in motion and doing it myself. The idea stemmed from the fact that folks at PhoneNews.com all use iPhone 3G on GoPhone Pick Your Plan accounts. This is something supported by iPhone, but AT&T has prohibited on iPhone 3G.

I will note however that iPhone 3G is the only device in the industry that is not for sale without a contract of some form, and that anti-consumer practice at launch is something I feel is unacceptable. While iPhone 3G will eventually be available without contract (and probably on prepaid as well), I feel it is not reasonable to prohibit such sales from day one.