They have a $99 360 subscription plan right now that works out the same way, it's basically $40-50 more expensive than retail.

Which is massively cheap compared to what you'd normally pay in mark-up for these contract type deals.

Yes the math doesn't make sense. Maybe $10 a month on top of a mandatory live subscription? Why would they give live away for free for 16 months with the subscription model. A 3 year contract with live at $50 a year would be just breaking even.

Which is why the subscription model will not be the same peice of hardware. It will be different skus with the $500 item being a "pro" console and the $300 item being a "basic or arcade" type model.

How successful is the $ 99 360? How were the sales affected when it arrived? I dont remember any kind of difference in sales really. 

It was almost as if people completely ignored it.. Or atleast thats what i remember

You live in a large city with great internet right?

You have to realize you're not the whole world and there is a significant portion of the world without great networks. Not to mention, many will simply not buy it on principle sake of DRM and go to Sony. (granted this means Sony won't be doing same thing)

Yes but that's $40-50 more expensive on top of xbox live. That one is 99 + 14.99 a month for 2 years = $458.76 which is $338.76 if you take off live at $60 a year.
That $300 one comes to $420 after 2 years if you take off live. So maybe a basic model?

iPhones are perfectly functional without an internet connection.

Here's the thing though, Microsoft has sold let's say...75m Xbox 360's for the sake of argument. With 44 million XBL users (Silver and Gold) all it takes it simple math to show that it will severely cut into their market share before you add people who won't buy it out of principle.

44/75 = ~58% of Xbox 360 owners have Xbox Live. But that means 42% do not in any way, shape, or form. That's before you add 360's that have more than one account on them which could be quite a lot considering they offered the family bundle. It could easily reach 45%....MAYBE 50% but that might be pushing it a little.

Now, my internet connection is fairly solid but what happens when there is maintenance on my internet or on XBL? What about launch day when everyone tries to log on at the same time? Or when there is a major release like Halo or whatever new IP they come up with? When that kind of thing happens, my first instinct is to pop in a single player game or play the campaign....but if the internet is gone, it essentially becomes a $300-$500 brick. There is the possibility of being able to use the tv tuner while the internet is down, but we don't know at the moment.

Retailers will have to inform people that it requires an online connection as well, otherwise there will be lots and lots of returns and very unhappy customers. Microsoft has to inform everyone as well, it isn't the kind of thing that you keep from people. Just like when they came up with the dichotomy between XBL Gold and Silver, except this is an entire console that (presumably) ceases to function when the internet goes out. People WILL know.

So i don't even know why people think it will be true

Maybe some games will require online(like Destiny),but whole console?nope