When Steve Jobs announced the App Store, he made it clear that Apple would be happy to take on the costs of hosting and distributing free apps. I remember thinking at the time that he actually seemed to be pushing the idea of free apps.
Free apps helped launch the iOS App Store into having stratospheric numbers of available apps, and probably pushed down the overall price of many other apps as well. But there's no such thing as a free lunch, even on the App Store(s). Apps take time and skill to be developed, and one of the unfortunate side-effects of the App Store pricing is that many people now expect apps to be free or low-priced. When I was using Palm software on my Treo, I regularly paid $10-$20 for apps, including games. With very few exceptions, most iOS apps are priced well below that.
This is good for everyone, right? Apple gets to boast about a huge number of available titles, users get access to an incredible library of inexpensive software, literally at their fingertips, and developers get ... um ... developers get ... noticed? A fleeting chance for fame? The hope that they might have the "winning the lottery"-type luck of an app like Angry Birds and sell millions of copies of their $1 app?
Developer Brittany Tarvin of FadingRed wrote a good article listing 13 reasons why software isn't free, and it highlights the fact that only Apple can afford to give you complex apps like Pages and iPhoto for very little money. That's because those apps aren't the only source of income Apple has (by a long shot!) as opposed to most developers who only have a few apps to sell.
I won't repeat all 13 of her reasons here (you should definitely check out the article, although be prepared to increase the font size in your browser), but just to highlight a few facts: 1) a lot of money goes into making software (salaries, office space, computers, etc.), and developers deserve to get paid for their job just like everyone else, 2) putting the software up for sale isn't the end of the developer's commitment, there's also fixing bugs, customer service, etc., and 3) not everyone can get outside investments or want to use ads.
My concern is for the long-term viability of the software market for iOS (and to some extent, Mac OS X) if the only apps we get are from large companies or "weekend hobbyists" who work on their apps in addition to whatever job they have to pay the bills. I want quality (ad-free) software, and am willing to pay for it, and I want to make sure that whoever has an idea for the next big (or even niche) thing can afford to bring it to us.
I still think that iOS developers are hamstrung by the inability to offer demos through the App Store. Much of the ecosystem is built around the idea that you have to be willing to buy the app without having used it, relying on videos or testimonials to see how well it suits your needs. Some apps, mostly games, have leveraged the ability to use in-app purchasing to let people get a taste of the app before buying the "full" version.
For example, my son saw me playing Astronut the other day, and after he finished the first four levels, he was ready to play the full version. Again, that model may work fairly well for some apps, but it's less clear how you could make a text editor or art program using in-app upgrades, and how you would figure out the balance between not giving away so much that your users didn't feel the need to upgrade, or not giving away enough to give your users a sense of the app as a whole.