Inside the iPhone with Wired

Even though this Wired article is six months old, it sheds a lot of insight on the initial development of the iPhone, including all the problems leading up to its release, plus a lot of detail on how the financial arrangement works between Apple and AT&T:

The demo was not going well.

Again.

It was a late morning in the fall of 2006. Almost a year earlier, Steve Jobs had tasked about 200 of Apple's top engineers with creating the iPhone. Yet here, in Apple's boardroom, it was clear that the prototype was still a disaster. It wasn't just buggy, it flat-out didn't work. The phone dropped calls constantly, the battery stopped charging before it was full, data and applications routinely became corrupted and unusable. The list of problems seemed endless. At the end of the demo, Jobs fixed the dozen or so people in the room with a level stare and said, "We don't have a product yet."

...

And what would AT&T think? After a year and a half of secret meetings, Jobs had finally negotiated terms with the wireless division of the telecom giant (Cingular at the time) to be the iPhone's carrier. In return for five years of exclusivity, roughly 10 percent of iPhone sales in AT&T stores, and a thin slice of Apple's iTunes revenue, AT&T had granted Jobs unprecedented power. He had cajoled AT&T into spending millions of dollars and thousands of man-hours to create a new feature, so-called visual voicemail, and to reinvent the time-consuming in-store sign-up process. He'd also wrangled a unique revenue-sharing arrangement, garnering roughly $10 a month from every iPhone customer's AT&T bill. On top of all that, Apple retained complete control over the design, manufacturing, and marketing of the iPhone. Jobs had done the unthinkable: squeezed a good deal out of one of the largest players in the entrenched wireless industry. Now, the least he could do was meet his deadlines.

There's a lot more than this in the four-screen article.