Almost but not quite right
"They do not guarantee to get you up to date, only up to the version that has been included in the repository."
Distros typically have several repos, not just one. Some of these may be "testing" repositories, there's not much point in going to the "latest" if it doesn't work or if it breaks other stuff — updates usually go through a QA process first. Really serious security updates go through very quickly and delay the QA process on less serious updates. External repos (like adobe's) typically don't have a visible testing repo, but the updates appear as soon as they are available.
"And if the app you want isn't in the repository at all, it won't get patched (remember when firefox 3 came out, and all the distros stuck with 2) It's a process controlled by a third party who may, or may not, decide to give you the patches."
Hmmm. I don't think it works that way. Red Hat, for example, don't usually rebase applications because the paying users value stability over the latest and, er, latest. You, the paying customer, are paying for this stability. On the other and, Fedora is much more likely to rebase. It took a little while to get Firefox 3 and Firefox 3.5 because the other parts of the distribution that depend on them (and they they depend on) need to be made to work.
If you want the latest and, er, greatest of some particular package then there's no reason at all why you shouldn't have your own repo. Both apt and yum are quite happy to include external repos. If you have a bunch of friends who want those latest and greatest then you can put the repo somewhere where you can all see it. The rpmfusion, rpmforge, epel and elrepo repos are examples of just this. (I'm sorry, I don't have examples of debian equivalents but I'm sure that they exist.)
The single, open distribution mechanism backed by an effective authentication mechanism does work. (It's not perfect, there have been a few celebrated attacks on repos with a view to, one presumes, dropping in signed malware. None have succeeded to date.)