Apple doesn’t want the iPhone to get the reputation of having poor battery life. Apple is said to have avoided 3G thus far because of power consumption reasons, instead opting for a lower powered EDGE chip. When Apple moves to 3G later this year, they will want to at a minimum keep the same battery life. Having Flash on the iPhone will mean a likely drop in battery life. Something they don’t want.
I suspect in 12-18 months when H.264/AAC is a more common encoding scheme, I think we’ll see a Flash component for QuickTime that can take advantage of the hardware on the iPhone. Right now there’s too much vc6 stuff out there.
Apple doesn’t want anything released to drain battery life or it will be accused of misleading consumers about average battery life. Keeping the CPU idle will help keep that time up.
I suspect the SDK will have some limitations on CPU cycles an app built can consume before it’s throttled in some way. For the exact same purpose. That’s fine for most things, most users won’t notice, but for video, any slowdown or bottleneck becomes very visible.