Moving to a longer cycle also has the benefit of being friendly to people who purchase the iPhone with a service contract. It's tough to be in a two-year deal for a one-year device.
Normal people don't buy a new iPhone every year. And even nerds should know that the market is moving at such a speed that it will be nearly impossible for them to own the latest and greatest at any point in time. All iPhones were at least 24 month devices.
IIRC, they allowed anyone to upgrade to a 3GS and cut off ~6 months for an iPhone 4, in addition to special iPhone 4 pricing for those under longer remaining contracts.
But yes, I imagine Apple has lost some leverage here now that AT&T is no longer exclusive.