The idea is that you pay for the cost of the phone like you would a car without financing and have it tacked onto the monthly bill. After the phone is paid, the overall price of the bill drops so you don't continue to pay a higher subsidized monthly bill like you do under the current contract plans with Verizon Wireless.
Here is a good article about it since T-Mobile went to this idea:http://news.cnet.com/8301-1035_3-575767 ... good-deal/
In reality with companies like Verizon Wireless, you will end up paying for the MSRP of the phone, which is why you have to have the two year contract; it's factored into the cost of the monthly plan. But after that two years is up, you continue to pay the higher subsidized bill price even though you may not have gotten a new phone.