You find it in AppStore

While no telecom company is pleasant to deal with, Telefónica is especially horrible, and some of the bait and switch tactics that I have been victim to, at their hands, are in fact, literally criminal.

Why do you suppose they are so eager to change their name to Movistar?

I didn’t do much homework, but rely mostly on luck, sadly.

http://www.expansys.es/d.aspx?i=183744

If you bring an iPhone that is truly unlocked, it will be able to use any SIM from any carrier here in Spain.
Making phone calls and SMS texts will cost exactly what-ever the company that you get the SIM card from says they will cost, (plus 16% sales tax.) What they charge you to get signed up in the first place varies from store to store, but all the little ‘nickel-and-dime’ fees and taxes that show up on U.S. cellphone bills tend to be much less significant here in Spain.
Incoming calls don’t count against your minutes, but you have ask specifically about SMS, which tragically often gets double-billed. (both sender and receiver.)

More good news, if you choose Movistar iPhone, although they are locked but, Movistar has tethering ENABLED in the iPhone’s software, and they told me that they DON’T differentiate between data usage from the apps on the phone, and data usage through tethering.
Also, if you reach your bandwidth limit (which counts both up and downstream accumulated) they still let you continue to use data, at NO additional cost, except that they throttle the actual transfer speed to about EDGE data-rates. (Which suck over here.)

*Be aware that Movistar’s data network can somehow tell if you take your iPhone SIM and put it in a 3G or HSPA modem. The bill you get after just light session of non-tethered modem usage, (just a couple hundred Meg’s of download, or so) will likely leave you broke.

THE OFFERS AND DEALS AVAILABLE AT THE VARIOUS CARRIERS AND BY THEIR DEALERS AND SALESPEOPLE IS TOO VARIABLE TO MAINTAIN AN INFORMED OPINION ABOUT WITHOUT CONTINUOUSLY SHOPPING AROUND.
A salesperson from Movistar cold-called me, and offered me an iPhone 3GS for 40€, “no matter” what plan I signed up for, so there are surprises.
Of course, the next surprise was that they sent me a Palm Pre instead, and it took weeks until they finally sent me the iPhone, but what I’m trying to say is that I can’t keep up with the deals and contracts.

The Bad, and the Complicated:
As of right now, there is still only one “official” way to use an iPhone in Spain:
–>buy one from Telefonica’s Movistar,
under at least an 18 month contract.

If, of course, you can find a store that has the iPhone you want to buy in stock.

Movistar has an extremely complicate pricing structure for the iPhone, and the price the charge you for the handset itself depends on which combination of voice and data plan you sign up for…

http://www.movistar.es/iphone

FOR EXAMPLE, using the official published prices:
(you must add 16% sales tax to any price listed below…)

You pay 229€ for an iPhone_3GS_16GB if you sign up for the minimum data with the minimum voice, at 15€ and 9€ a month, respectively.

This means you pay 229€ up front for them to give you the iPhone, plus whatever sign-up fee the guy at the store decides to charge you for getting a new Spanish mobile phone number; (maybe 25€ extra.)
Now you start paying a minimum of 24€/month (voice plus data,) for the next 18 months.

A note about what Movistar means by “9€/month voice plan”
- this means that the absolute least they will charge you per month. for the mere privilege of being able to make phone calls, even if you literally never call anyone during the entire month, is 9€ plus tax.

More complications from Movistar…
According to what they have told me a couple of months ago when I bought my iPhone through Movistar – If I had signed up for a more expensive set of monthly rate-plans, in order to pay less up front for the iPhone, I could not later change to a cheaper plan during 18 months. If I want to change to a more expensive rate plan during these 18 months, in order to get more “minutes” or to raise my bandwidth usage threshold, there will be no retro-active rebates on the price of the handset itself.
Also, they said that even after 18 months are fulfilled, they do not offer any service to officially unlock the iPhone. I will have to check up with this, as it is technically against the law for them to deny this to a customer who has fulfilled their contract, and who officially requests an unlock-code or service. Apple even officially has a system built-in to iTunes to recognize when an iPhone has been ‘liberated’ – so we’ll see.

Final bad news: A passport and a smile may not be enough to ‘allow’ you to buy a cell phone and a data plan from many carriers, who often require a photocopy of a utility bill and a residency card before they’ll let you sign a contract.
Pre-paid guys are easier in this sense, but as of this year, in all of the EU, some form of positive ID is still required, even for pre-paids and thow-aways.

I am about to move to Madrid and given that you seem to be up on the iphone I have the following question. I can get a friend to buy one in Hong Kong and bring it over and then join a local operator. Or I can wait until I get to Madrid and get one there. Are there now good deals with Spanish operators that make the hardware almost free, as long as you sign up for a year etc? many thanks, raphael