Technically, the developer can distribute it to friends. He's in the iPhone developer program, he can use the ad-hoc distribution method to send it to friends. I suspect if he "released" the source, any person in the program could do the same.

But yes, I understand your point. The app store model has some benefits and some downsides. The simplest thing to do is to just not buy an iPhone or develop for one if you dislike the model. I know that I don't like some aspects of it from both a user and developer perspective, but I like it more than what I had to deal with when I had other smartphones/PDAs.