The sharp price drop so soon after the release of the phone is fishy I agree - either they were after a large mark up for the first few weeks or somebody needs to be fired for getting the price wrong, but the point was more that Apple were at least offering some people something (despite the catches) when they made the change.
AT&T aren't paying the same high subsidy that O2 probably will, but they are still
paying Apple purely for the privilege of using the phone. While it might not have all the latest technology, the lure of an iPhone to switch operators does seem to be working - there are people in the US ditching their old phones and networks in favour of AT&T. Not because AT&T might offer a better service but because they have the iPhone.
Maybe cutting edge was the wrong phrase - the iPhone doesn't even stretch as far as 3G (if memory serves) which means that operators have a higher operating cost to get the content to the phone that they want to make their money from. At the end of the day the whole thing is about working out what people are willing to pay and Apple proved that despite any limitations of the product people are willing to pay over the odds. They're not the only company to do this - our own government proves that point on a regular basis!