Also you have to remember, you're not just paying for the phone on contract. You're paying for the usage aswell.
E.g. a £10 contract gives 100 minutes, 100 texts and a booster of your choice (which can be unlimited texts/landlines or internet and some other stuff too) and even the 100 minutes and texts without the booster is the equivalent of about £45 of top up credit on PAYG. (on t-mobile anyway, not sure about other networks).
People seem to forget that the phone is just a bonus. The network provides you with a phone so that you can use the minutes and texts. People get just forget all about the minutes and texts that they get for their £20 or whatever and think of the contract as a finance agreement for the handset which is completely wrong.
A £30 for the desire that t-mobile do gives you 600 minutes, 500 texts, unlimited web and another booster of your choice, which on PAYG would cost £175 a month in top ups (if it was 20p a minute, 10p a text and £5 a month for internet). On top of that you'd then have the cost of a phone aswell which in the case of a desire is £400!
So over a 2 year contract you pay £720 instead of £4200 + £400.
So yeah, phone contracts are epically cheap in the UK.