Like its predecessor, the iPhone 5 starts at $650 here in the US. That's the full retail cost for the entry-level 16GB model, which is pretty expensive by most standards.
Luckily, many carriers will pay for $450 of that, knocking the price down to $199, if you're willing to sign a two year contract with them. How can they afford to do that?
Oh don't worry, they make their money back and then some...