I think the iphone only works if its actually hooked up to a cell network. I do know that you cannot turn off the data part (if you just want to use the cell). There might be a hack to do that, but that would involve messing with the operating system of the phone.
If you just want an MP3 player, there are a ton of them that are decent for about 30-50 bucks with no payments. OR, just look on ebay for a used ipod from a reputable seller (or ipod touch). Either way, that would be far less than paying even 40 bucks a month for 2 years on a phone which you do not want to use.
If you do not want the phone part, I would sell the iphone on ebay, take the cash and buy an ipod touch. This would probably net you a few bucks, as the phone is worth far more.