Also, the reasons for not making launches cheaper has been "why is it important to make launches cheap? Isn't the total cost dominated by the cost of the satellite anyway?"
Also, ground processing and all can get very expensive because it requires so many people and clean rooms etc and can be delayed. It depends if you think it's part of the satellite or the launch cost.
Overall you need to start somewhere if you want cheaper spaceflight. If there are cheaper satellites, then that's a big incentive for developing cheaper means of launching (and launching much more often too!).
It's partly a chicken and egg style thing. Launches are extremely expensive and far between and the big standing armies and facilities sit unused but have to be trained, maintained and paid. It's hard to break that circle, but it will be done, probably through some totally new technology that is first seen as just toys.
Doesn't look like anyone's reached space yet but:
http://news.discovery.com/tech/hackers-launch-satellites-120...
Interesting discussion on some guys who reached 100,000 feet:
http://news.ycombinator.com/item?id=1750517
Edit: actually they're launching via rocket -
"Three NASA PhoneSats systems (two PhoneSat 1.0's and one PhoneSat 2.0) are scheduled to launch aboard the maiden flight of Orbital Sciences Corporation's Antares rocket from NASA's Wallops Flight Facility at Wallops Island, Va., later this year. "
None of this is about orbit. Orbit == high velocity and altitude. Although high-altitude balloons regularly go about 40km that's still in the stratosphere and nowhere near space and the velocity is nowhere near what's needed.
These phone-based cubesats are a good idea. There have been plenty of phone-based balloon flights and there's no reason not to use them in satellites if you have some way of recognizing failure because of cosmic rays.
Remember, everyone, space isn't that far away—if they put in a highway, you could drive there in about an hour. It's easy to think about space being very far away from us and untouchable, but it's actually quite close and just out of our reach. Keep reaching, fellow humans.
He's just being accurate. 'Ballooon reaches spaaaace!!1' articles upset H-A-B-ers more than most.
The other advantage in having NASA lead the way in the cheap satellite area, it will be easier for others to take advantage of cheap launches when they are eventually available. And possibly help create demand.
The cubesats (this is one) were developed as a way to prototype ideas and to get a larger segment of people involved in space activity. They are squeezed in to other launches. They're a very special case.
The phenomenon of cheaper, experimental missions is fractal. There are technology demonstration missions at many different price points (up to the 100s of millions of dollar range) that may have fairly modest science goals, but they're trying to show that some exotic bit(s) of tech (autonomous landing, laser communications) can work in space.
Edit: For innovation on size, check out KickSat