Photoshop is around $600-700 for the full product, $200 for an upgrade. That means that the full product plus one upgrade is approximately equivalent to two years of subscription -- which is the amount of time Adobe is planning to go through two versions anyway. After that point, owning plus upgrading is cheaper, but it seems likely that by that time Adobe will have tweaked the subscription and upgrade prices to make owning less appealing.
The people they are really going after are those that need to swap Adobe files (e.g. creative consultants and their clients): Inter-version compatibility is a headache for any participants who aren't on the latest version. Things could get particularly ugly if they start releasing features to subscribers that aren't otherwise available until the next version.
Most professionals/companies already have a copy of Photoshop so they are competing with upgrade pricing more than full retail pricing. Upgrade pricing is set so low because most users don't need the latest version anyway. (It's still 200$ to upgrade from CS2 to CS5).
Edit: You can also upgrade student editions to full retail versions, so "having a copy" includes the student edition.
PS: For most non professional people a 400$ copy of CS3 is plenty. Next year they can probably upgrade to CS7 (for 200$) and then stay on a 2-3 year upgrade cycle after that.
Or Australian. If Photoshop was $500-$600 AUD I would probably buy a license. For $1.5k I could buy a new computer instead and continue to use free tools.
The people they are really going after are those that need to swap Adobe files (e.g. creative consultants and their clients): Inter-version compatibility is a headache for any participants who aren't on the latest version. Things could get particularly ugly if they start releasing features to subscribers that aren't otherwise available until the next version.