The option would have eventually allowed customers to buy an iPhone, and set it for work with different networks by a simple download off the App Store. European carriers went bananas when they heard, and said this will give users the power to strong-arm them into shorter contracts or better deals, since they could easily reprogram the iPhone when a better deal appears on another carrier, or when traveling, in order to avoid expensive two-year lockups, or roaming charges.
Apple caved in under all this pressure, and, according to one senior carrier exec: "Apple has long been trying to build closer and closer relationships and cut out the operators. But this time they have been sent back to the drawing board with their tails between their legs."
The embedded SIM card plans are still on for the next generation iPad, though, which is expected to appear around April 2011, and have a integrated baseband radio that will work on most networks worldwide. The tablet is sold at full price, and Apple doesn't rely on carrier subsidies to make it cheaper for people.
On a side note, the source also reports that a new iPad version will be released soon, that will have a mute, instead of lock button on the right side, similar to the iPhone. Obviously they meant an update to the function of the lock button, brought on by iOS 4.2, as pointed out, so we don't know if we are to believe them now about the abolished built-in SIM option. In any case, it would be a crying shame, considering how strong Apple's brand is currently. So much for Apple turning the relationship with carriers upside down in favor of its iPhone users.
Maybe they could still make some iPhones with embedded SIMs to sell unlocked at full price for people who don't mind getting them like that, and switching between carriers. Nothing is mentioned about the other functionalities of this embedded solution, like using the iPhone for mobile payments and as an access card, so these could remain unchanged.