Rounding errors.

I imagine this quote working like this: a player of skill level $p$ hires players around skill level of $p^2$. You assign classes as follows: A = 1.0, B = 0.9, C = 0.81, D = 0.64, E = 0.4, ... Now A players hire other A players only as long as their skill is exactly equal to 1.0; if it dips even the tiniest amount, the degradation process starts.

Of course the whole thing is utter nonsense, but if I had to picture it, that's how I would do it.

An A player who thought a B player was an A player

So maybe the hiring A player is also a B player after all?

I think the quote is meant to convey that 'A players only want to hire A players', 'B players only want to hire C players' and so on

Naw, then he'd have hired a C player :^)

I don't think Steve Jobs was saying that Apple has 100% A players. I think he was advocating having the better employees have an increased role in the hiring process. I think he understood that A players are the top twenty percent or so (because that's what "A player" means), and for a company with hundreds of engineers to have them all be in the top twenty percent is extremely unlikely.

The quote could mean there’s a significant gap between the best and the rest.

Maybe people transition from A->B->C or other way over the course of a career.

They founded the company.

Citation for that quote?

Nobody. The B players are the founders.