The thing about RAM on consoles (and PCs, really) is that it's complicated.
On the PC the only way most applications will allocate memory is through new/malloc. Additionally, on the PC this memory is not guaranteed to always be resident; pages will get swapped out to disk and moved around in memory as the OS sees fit to facilitate the multi-tasking that we now all expect as a part of desktop computing. Ever idle or alt-tab in a computer game and come back only to have the game go choppy or even lock up for a bit before playing smoothly again? That's probably probably due to page faults -- the game tried to access memory that it had allocated and the OS found that the pages had been swapped to disk, so it swaps out other pages (if necessary) and then swaps the pages the game needs back in.
But until this generation consoles couldn't count on there being any physical backing store for things like page swaps to happen, so the memory you got was literally the physical memory you used. I imagine games probably allocated it in an entire block and then divvied it up with its own specialized allocators for the games' usecases.
This generation though there is the guarantee of a physical backing store in the included harddrive. The OS simply has to reserve some of that, and then it can do all this neat swapping to facilitate this new expectation of multi-tasking from a home console. Of course when this was added, some engineers probably thought to themselves, "Well, why not let games get some of this action? We'll reserve 512MiB of physical memory to be managed by the OS in the paged style and give it to game developers!"
So, assuming my guess at what this so-called "flexible" memory is (and I think it's a safe bet given all the mumblings of reduced performance due to paging), developers now have access to essentially the best of both worlds. They can put non-critical latency-tolerant stuff in paged memory, and put everything else that you can't gracefully handle a page fault on in the 4.5GB of guaranteed-resident memory.
Oh, and the neat thing about swappable memory? You can allocate more of it than is physically reserved. True, you can't access more of it than exists at a given time without encountering a page fault, but some clever game programmer is going to find a way to make the best of it.
Though, according to the article, there seems to be another 512MiB of flexible memory guaranteed to be resident. Not sure what the point of that is though.
