It's a topic covered quite often and quite widely in this industry. It refers to when a carrier is able to keep the price of a device really low because it's charging you a monthly service plan during what is generally a two-year term.
The majority of a carrier's subscribers take this route, but it's not always the best. When you purchase an unlocked device, you obviously pay the full price for it, which is usually at least $200 over the subsidized cost and is sometimes much more than that. But with the extra cost comes a lot of advantages.
I'll use the Nexus S for a basis of price. This phone is on T-Mobile, which is the carrier I'm drawing prices from.
Unlocked. The unlocked Nexus S is $529.99. T-Mobile has quite a few plan options for unlocked devices, but we'll look at the top-tier: $70/month for unlimited talk and text with 2GB of data.
Subsidized. The subsidized Nexus S is a lot lower upfront, coming in at only $199.99. Its top-tier plan is $99.99/month for unlimited talk, text, and data.
The main difference between these two plans is the capped and unlimited data plans. It could be a major issue for you, but I rarely go over 100MB with my iPhone, and the unlocked plan is less than what I pay AT&T now with 1.8GB more data.
Over a 24-month period, you're looking at $2209.99 for the unlocked version. That includes the price of the Nexus S. As for the subsidized version? $2599.75. This also includes the device's price. That's a difference of $389.76 over a two-year term.
But more importantly than a better price is the freedom you have. Since it's a no-contract plan, you're free to leave for another carrier whenever you feel like it. No early termination fee or anything. The reason most people go this way is because they're simply unaware that there's another route.
In T-Mobile's case, there is one tiny advantage to having a monthly plan: unlimited data. But if enough people were to go into a no-contract plan, T-Mobile and the other carriers would likely add it in for a little money extra per month.
Do you have an unlocked phone?