Steve Jobs thinks current mobile advertising sucks and Apple's answer for iPhone OS 4 is iAd, an HTML5 platform that gives developers a 60% cut of revenue and provides... what basically looks like ads as apps.
iAd will provide developers with an easy-as-Xcode way to place advertising in their apps, both paid and free. Apple is setting a high bar for their ads, however. No simple Google-style text, annoying punch-the-monkey, or jarring transition out of the app and into the browser, they claim to want great looking, highly interactive, emotionally compelling content that will connect with rather than alienate users. Served every 3 minutes. Yeah...
Functionally these are built in HTML5 (no Flash need apply) and seem to work as apps-within-apps. Tapping on a banner brings up a full-screen ad-as-webapp and examples shown included plenty of animated UI effects and content that ranged from videos to freebies like wallpaper, to free and paid apps you could download from within the ad (no trip to the App Store needed). An exit button is persistent at the top left so users can quit the add at any time.
Apple will be selling and serving the ads, so all we can do is hope they're unobtrusive and actually reach the quality levels presented. For paid apps that also try to include in-app iAds, that bar will rightly be very, very high.