The device, IMHO is more than a phone. In fact, I think Apple could be blowing a big opportunity to sell these units as they are w/o the phone requirement.
For example, with the WIFI aspect, video, ipod features and what not, these devices would sell on their own, even for $200 more (without contract) easily. Calling it a "phone" significantly decreases it's appeal. This is a very awesome, mobile computing smart device that could be your walk around browser and mail device (wifi features alone). Not to mention videos and music, camera features, and what not.
My BET, is that Apple WILL sell this phone w/o contract for 200-300 more per phone and while you won't be able t use the phone feature, the other million features will be available to you.