In places like Africa you buy phones from a stall in a market square. No contracts, because they're not enforceable.
I think the only credible (and very real[1]) competitor to low-spec Android handsets is Windows Phone, which with the Tango update will run on really low-spec hardware. Nokia is playing a solid game here.
[1] Real because Nokia rule the feature-phone market, not so much in Asia but very much in Africa. Nokia have a reputation for quality there that Android, as the new kid on the block, will have a hard time displacing.
Which part of 'on-contract' you didn't understand? The full phone price is in the price of contract with interest.
Of course you can buy sub-$50 phones on contract too, in which case the monthly payment would be much lower than AT&T's $99 iPhone plan, of which about half goes towards the phone payment.
The choice isn't between cheap and expensive iPhones.
The choice is between cheap and cheap. Or phones in particular price ranges which compete on features and aesthetics.