It's a shock that a subsidized device with a 2-year contract costs less than one that doesn't require a contract? Hard to claim balanced reporting when you slip that one in, El Reg.
Anyway, Jobs' point is actually 2-fold:
1) Specs are not king
2) The other guys don't offer anything at the lower price point that Apple hits by lowering specs
(Fascinating, by the way, to see Apple competing on price.)