Apple rolls out full-screen interstitial and pre-roll video iAds, expands to Russia and Switzerland

Both!

(Except you probably mean better for the user.)  The 'better' way appears to be freemium time-grind games (which usually still have ads, so technically the answer is 'all three!').

Either expensive high-quality apps are harder to sell to the mobile crowd (yep) or there's less risk for developers in putting out ad (and/or smurf-berry) supported apps so they lean that way.

I think the real issue in the end is discoverability and transparency for the App Store itself.  Adding 'contains in-app purchases' was a tiny step in the right direction, but what we really need is some sort of semi-organic tagging so that you can easily see if a game is a time-grind or not, and whether and how quickly progress grinds to a halt w/o paying real $.  We need to know if the in-app purchases offered are pay-to-play-esque or if it's stuff like additional levels (things of reasonable real value).  I'm using games for my example here, but as far as iAd goes, it'd be nice to know from such a transparency layer if apps' use of ads is in the normal range, or if they're too frequent or too annoying - and whether having ads is worth what you get in return.  It'd also be nice to know if paid apps also include ads.  

Ahh - the walled garden.  So clean.  So zen-like.  So frustratingly slow to become useful in certain respects.  

I just hope that with the App Store Apple is doing their usual thing of silently working on 'getting it right' rather than publicly throwing spaghetti at the wall all the time.