I imagine this is happening:

1) New iPhone 4 owner downloads a free flashlight app. Plays around with the one-button interface, gets bored.

2) Notices iAd, clicks on it.

3) Navigates around the ad more than he/she does the app.

I don't see the $1400/day revenue lasting much longer for this developer. If the user launches the flashlight app in the future, they'll just use the flashlight and quit. I doubt many people will actually touch the ads when they're searching for stuff in the dark.