He has invited people to do just that; if you make it with his public API, and he thinks it's good enough, he'll let you call it the official Android version and split revenue 50/50.
I'm not sure that update supports the claim of back tracking.
That was an update after the original piece (sadly not dated) but I think it's more sensible to assume that the update was written in response to Shift Jelly reading it and contacting him, rather than him being in discussion with them before writing it. Certainly I'd think it would be a very odd piece to write if he were already in talks with Shift Jelly.
The piece certainly implies that that there would be discussion around the project ("the details of which we’d work out privately" in relation to the functionality) rather than him thinking that people would just start coding and then come to him with a finished article so it reads more naturally as a clarification than something more radical.
No, he didn't (backtrack). He said, in the original statement, that he challenges anyone to make on, and he will call it "the official Instapaper app for Android"
He probably didn't expect many takers on the offer, but when they emerged it became OBVIOUS that this couldn't happen with more than one taker --only one could be the "official app for Android"), so clarified it with him picking only one to proceed with.