BusinessWeek ran a story recently on the Apple Application Store business model and specifically wondered if applications will ever become profitable for developers. Interestingly, the story doesn't actually state anything concrete about how much money application developers are making, except to suggest that since most apps are priced at $0.99 or free, it must not be much. While it is certainly possible that these developers are making substantial amounts of money selling millions of apps at these low prices (the cost of serving up an additional app download is fairly minimal after all), I think the author is also a bit pessimistic about the future price point for apps.
Currently, most applications are mere novelties, simple games, or repackaging of services that are already available for free on a website. None of these products inspire a user to pay a substantial fee, resulting in a huge array of very low priced apps. However, as the phones and OS platforms continue to develop and become more sophisticated, this is sure to change. In time, application developers will be able to develop real software tools which provide enough value to the consumer that they would be willing to pay for it. With rumors of a new iPhone on the way and videos circulating of the new Palm Pre running multiple applications simultaneously, we can already see that this is happening much faster than anyone expected.
In my opinion, as the mobile sphere matures and smart phones become common place, the application industry will become as profitable as the computer software industry. The real question is just whether these businesses will make their money through the traditional pay to use model or the ad-supported model being pushed by Google, or perhaps something else entirely.