Would I like to be able to use more crazy, non-standard , non-Apple-approved software on my iPhone? Hell yes! If I were Apple, would I allow others to distribute software for my device? Hell no!
If I had created both the device(s) and application market, I certainly wouldn't let other people compete with me in my own business -- that's just foolish, especially since the current business model works, and works well. Appeasing a minority of highly technical users doesn't make sense in this market.
Besides, how is Apple's model different from what set-top console makers (Nintendo, Sony, Sega, ...) have done for years? $99 is cheap for a console development kit; since you must have Mac to run it, it'd be about $700 total for a development kit + Mac Mini -- and that's still inexpensive in the console devkit market. It's a unique niche, and I'm more than happy to pay to play in it.