Interesting and good blokes logic, my only comment on your deal is O2 offered me similar money for my iPhone 3 a year go but I sold it on the bay for £260. That said it was immaculate as always cased. However your deal was simpler with no come come back so quids in as they say.
It works this way for me. I get a discount through O2 because of my occupation of 30%, therefore I pay approx' £35 a month (inc tax) on an 18 month contract and then get in excess of £250 back for the phone at the end of the contracts term. This work out something like £20 a month for 1000 mins and free txt. Cheeky.