__IPHONE_OS_VERSION_MIN_REQUIRED
is indeed just a build setting, which you can use in the preprocessor to modify code before compilation. No, Apple doesn't compile your code for each iPhone. They can't, since you don't give them the code. You can use compile time checking to determine, for example, if you need to compile code to emulate a new feature in older OS versions. However, you use runtime version checking to determine whether you should use the built in or emulated version of that feature.
For example, iAds were added in 4.0. You currently support 4.0 and later, but plan on adding support for 3.2 in the future. You make code to display other ads in older versions, using runtime checking to determine whether you should use iAds or other, but you don't want it to be in any releases until the rest of the application is ready for 3.2, since it will make your application larger. You use compile time checking so that the preprocessor leaves that code out of your releases. By using the minimum version macro, you can easily add the code to your release by changing the minimum version build setting.
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