The internet is ablaze with the news, first that AT&T would start offering iPhone 3Gs off-contract to previous AT&T customers, and now that Apple Retail Stores have begun selling iPhone 3Gs off-contract to anyone for some pretty steep prices: 8GB models for $599 and 16GB for $699. Having bought a first generation iPhone 4GB for regular price and maintained it off-contract on an AT&T GoPhone pay as you go plan since I first bought it (thanks to an early loophole that AT&T and Apple subsequently locked up), I don't see this as a deal at all, and chances are that neither should you. Why not? Well there are 5 main reasons that we'll examine in detail below.

Reason 1: The price is too high

Many will mistake the lack of contract to mean that the month to month cost of the device will be much less, and therefore, the extra cost will quickly be made up. However, unless you unlock the iPhone you purchase, you'll most likely be going with an AT&T GoPhone plan where you'll still have to pay $20 a month for the iPhone data plan alongside any minutes you buy per month, and although there is no contract you still have to pay by the month to feed your plan, even if you have leftover rollover minutes. Also, if you do unlock the iPhone, you'll still be paying a monthly fee at some other carrier and you will most likely have some difficulty with some of the functionality of the phone, like the visual voicemail and the YouTube video application.

Factor those bits in with the fact that a 8GB iPod touch costs only $229, a 16GB iPod touch costs only $299, and a 32GB iPod touch costs only $399, and you can see that you're paying a $400 premium on the 16GB iPhone 3G sans contract over the $299 16GB iPod touch, which also comes without contract. "But the iPod touch isn't a phone and it doesn't have a built in camera!" you may protest. This is true, but one could easily purchase a $399 iPod touch at double the capacity of the top iPhone 3G, and then purchase a simple camera phone with whatever carrier contract or not that one prefers and still be paying less than for the off-contract iPhone 3G.

Also, keep in mind that the iPod touch not only can hold twice as much data on its 32GB drive as can the iPhone 3G, but the second generation iPod touch has a better 532MHz processor than is found in the iPhone 3G which has the same 412MHz processor found in the first generation iPhone and iPod touch.

Reason 2: Skype is coming; alternate VOIP solutions are already here

Om Malik claims that Skype for iPhone is as close as a weekend away. If you're thinking, "Great! All the more reason to get a non-contract iPhone and never sign up for cellular service!" think again. The iPod touch with the lower price point, the increased storage, and the better processor should also run Skype for iPhone (just like it runs Kindle for iPhone). Also, since Apple's iPhone headphones with built-in mic work with the iPod touch, it's already a viable VOIP solution using other tools.

Reason 3: iPhone OS 3.0

Apple spent a lot of time recently debuting its forthcoming iPhone OS 3.0 with several added features, including copy and paste, MMS messaging, and push notifications (you can watch the full video of March 17th's iPhone OS 3.0 event if you missed it). Amongst the details covered at the event was news that the new iPod touch (you know, the one with the faster processor, more storage space, and lower cost than the iPhone 3G) actually has Bluetooth functionality built-in that is currently non-functional, but which will be activated by iPhone OS 3.0, which will cost iPod touch owners a whopping $10. That's much better than the $400 markup on the contract-free iPhone 3G. That means that once iPhone OS 3.0 arrives the iPod touch will have nearly all the functionality of the iPhone (sure, no cellular or 3G connection, but if you're near Wi-Fi all the time you won't really need that connection and you won't be paying for it) including the ability to place and receive calls over VOIP and Bluetooth connectivity.

The only thing really missing will be a built-in camera. Of course, one of the other great things about the new iPhone OS 3.0 is support for 3rd party peripherals, so that add-ons can now have their own applications on the iPhone or iPod touch that can interact with their hardware devices. It shouldn't be too long, barring any interference from Apple, before someone releases either a peripheral camera for the iPhone / iPod touch that has a better resolution than the paltry webcam in the iPhone, or someone releases a photo adapter that will let you quickly put the pictures from the digicam of your choice on your iPhone or iPod touch (Apple makes one for regular iPods already).

Reason 4: There will be a new iPhone this summer

I've gone on record before predicting that there will be a new iPhone released this summer, and after the release of iPhone OS 3.0 there were a few bits of information leaked in the code that would seem to verify that prediction as well as pointing to some new mystery device. Now that Apple and AT&T are jointly offering iPhone 3Gs off-contract, many think that it's a move to clear warehouses of inventory to pave the way for this new iPhone. What's more, Apple just recently announced that its WWDC 2009 will be held on June 8-12th and the graphic for the announcement shows off the iPhone. Most likely, this event is when some new iPhone will be announced, and this one will have more features, better connectivity, and a processor finally either equal to or better than the current iPod touch. However, I'm pretty sure this new one wont be available without a contract.

Reason 5: Alternatives

The final reason you shouldn't spend so much money (in a recession to boot!) on an off-contract iPhone is that there are plenty of powerful alternatives. Hopefully, this quick list of reasons gave you a good perspective of why buying a top of the line iPod touch with an optional no-frills camera-phone may be the best option for you.

If that sounds like too many gadgets to be carrying around at once, then either wait until this summer for the new iPhone or consider one of the cool alternatives. There's a whole slew of Google Android-based devices on the horizon, as well as the T-Mobile G1 which you can grab now, and soon we should see the Palm Pre, which by all accounts may just be a real challenger to the iPhone.

Have any other reasons why an off-contract iPhone should be avoided? Disagree and think this is a valuable and viable option? Let us know what you think in the comments below.

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