It's not just "handsets are expensive, so we're selling them on an installment plan" or "because we provide locked-in service." It's because the cell phone companies, and indeed almost every other business, does not want a revenue stream at slightly above the cost of providing their service. Cell service providers want the greatest possible monthly revenue stream, which will almost certainly result in a higher margin, to occur over the conract period and beyond. They figured most of us wouldn't trade in their handsets every 2 years, which resulted in nice margins once the handsets were paid off. Did you see your cell bill drop after 2 years? I didn't.
If the cell phone companies could have gotten away with locking customers into 3-year+ contracts they would have, but that's a separate issue
It's not just T-Mobile nibbling away at AT&T, Sprint, and Verizon 2-year contracts. It's MVNOs putting pressure on the sacred 2-year contract, too.
At the risk of burning karma points, here's a consumer-focused article I wrote describing how MVNOs might save a consumer money in monthly service fees: http://www.bills.com/bills-blo...