Actually what is being offered is a compromise. The full retail value of the 32 GB model is $699 not $499. AT&T is offering those iPhone owners who purchased their 3G upgrade last year, under the terms of a 2 year subsidization contract, the opportunity for a special upgrade at half the subsidization cost. So, for example, when I bought my iPhone 3G last year on day 1, even though I promised to complete an entire two year contract to cover the major discount offered at the time, I will still be able to restart a new two year contract and be rewarded with a $200 discount.
So even though those with no further contract obligations (actually, in many cases you can upgrade at full discount after only 18 months of your 24 month contract) and those new purchasers will get a nice $400 discount, I think I'm getting a pretty honest deal with a half discount halfway through the obligation.
However, many people are clearly confused for various reasons. One cause is likely that many of these iPhone customers were never smartphone customers before. These people had no idea just how much money smartphones cost MSRP. The other part of it is original iPhone (Edge) buyers were not subsidized at all, and when the 3G came around, the offer was presented as though it was a special situation allowing for an early upgrade. Well that is partly factual, if you wanted to upgrade to any other phone you would not have been able to at only one year. I find this aspect to be particularly disgusting on AT&T's part, but it's all part of the contract... At any rate, since there was no subsidization in the original two year contracts for AT&T to cover, it was a no-brainer for them to offer full subsidization to 3G purchasers.
So ultimately, many people are expecting to get exactly the same full subsidization "special" offer they got with the 3G but there has never once been any promise that they would.
So I say: If you're not happy with the pricing, don't buy the new phone. If you feel bad about the whole situation, at least try to fully comprehend what happened and why the 3G's subsidization was not nearly as special as it seemed (AT&T sacrificed zero subsidization from your original contract whereas now they are offering to sacrifice half of the one from the 3G). It's understandable to be dissatisfied with an offer regardless of the terms, but not understandable for people to go all emo over the terms as though they were somehow owed or promised something else when they obviously weren't.
For the record, I intend to pick up a 32gb upgrade for $500 because frankly, I was happy to buy the original 8gb for the full original price. To me it's valuable for the added space alone. Everyone has to make this decision for themselves obviously but at least have the character to realize you are not being ripped off, and you are not somehow owed a better offer just because you really want the phone.
Fandom does not make you special.