The following correction was printed in the Guardian's Corrections and clarifications column, Thursday 30 July 2009

In a report below about iPhone applications we quoted Steve Jobs, the founder and CEO of Apple, saying "iPhone is off to a great start – we hope to sell our one-millionth iPhone by the end of its first full quarter of sales – and our new product pipeline is very strong." That statement was not made earlier this month, as we said: it came from an Apple press release dated 25 July 2007. On 21 July Apple said it sold over 5.2m iPhones in the third quarter of 2009.

One day, Lance Stewart was trying to get out of Oxford Circus tube station in a hurry. "I got off the train and suddenly found myself behind a huge crowd of people blocking my way to the exit. I was just an average Joe in the rat race getting frustrated by being stuck behind the crowds."

Then Stewart had a brainwave. What he needed was to get the jump on the crowds by knowing which carriage he should board to arrive at the platform exit. If he somehow knew, for every station platform on the London Underground network, which carriage would arrive at a station next to the platform exit, he would never be stuck behind foot-dragging tourists again.

And then he had an even better idea. He would put all this information into the form of an iPhone application for other commuters. He would sell it to them and quit his job working for Virgin. Only one problem: there are more than 700 platforms at London Underground's 268 stations. "At first I hired somebody to go round the stations compiling the data, but they didn't do a very good job, so I did it myself." He then approached an apps developer with his idea. "I know nothing about creating an app – I didn't even have an iPhone at the time. I just had the content."

Tube Exits has been a popular iPhone app since its launch on 16 June. It comes in two versions: one is free but only gives you the information for the Underground's busiest 12 stations, the other costs £1.79 and covers the whole network. "The idea was that it was the price of a zone 1 ticket, but you could use it again and again." Has the app made the 33-year-old Australian rich? "Nah. It's covered my costs, which were about £3,000, but it certainly isn't a retirement plan." That said, Stewart is now developing a similar app for the Paris Metro and sees no reason why his original idea can't be applied to other metro networks around the world. I point out to Stewart that his isn't a new idea: there used to be a little booklet giving London Underground users the same information. "The great thing about my app is that it can be changed really quickly when users report errors," counters Stewart. "I made a mistake about how to get out of Temple station and have now corrected it. I can revise and revise until it's perfect."

Tube Exits is just one of an estimated 100,000 apps that will exist by the end of this year. Apps are mobile applications designed to be used on smartphones such as iPhones or BlackBerrys or devices such as the iPod Touch. Ilja Laurs, chief executive of GetJar, a leading independent application store, told the MobileBeats conference in San Francisco earlier this month that apps could be bigger than the internet by 2020. Some 65,000 apps are currently available for Apple's iPhones from the corporation's App Store, which marked its first anniversary earlier this summer. But in that year, the apps industry has grown exponentially – the total number of Apple's App Store downloads recently passed the 1.5bn mark.

The App Store's success is reportedly a surprise to Apple, but presumably an even bigger and nastier one to competitors such as Research in Motion (who make BlackBerrys) and Nokia (the world's biggest mobile phone maker). The App Store's staggering success has led nearly every maker of a smartphone operating system to mimic Apple's business model: make it very easy for smartphone users to buy or freely download software created by from third-party developers.

At the moment Apple has something of a stranglehold on apps: Tube Exits is typical in that it can only be used on Apple mobile hardware (ie iPhones and iPod Touches). Apple has even won, if unwittingly, the battle of nomenclature: apps could have just as easily been called programmes or software but instead they are called apps, echoing the corporation's first syllable and thus stressing their seemingly umbilical link to one particular supplier of smartphone hardware.

What are apps? Some are games (such as Who Has The Biggest Brain?, which was played by 25 million people on the internet before being launched as an iPhone app, and its rival The Moron Test), some are silly (one allows you to download the image of a fan on to the screen of your iPhone, the aim being to make you feel cooler), some are edifying (one app consists of an audiobook of Hegel's Lectures on the Philosophy of History, whose text scrolls on the phone's screen as you hear it read aloud). Among the most popular is a now venerable one called iBeer, which transforms your iPhone into the simulation of a beer glass. Tilt it to your mouth and you seem to be drinking beer. There is even a way of seeming to pour virtual beer from one iPhone to another. And they say technology is all about progress.

In the first few months of the App Store, amateur software developers made tens of thousands of pounds each from fatuous software downloaded by iPhone-owning hipsters with, or so you might think, more money than sense – and far, far too much free time. Thus, Kostas Eleftheriou, 25, spent a week developing the iSteam application, allowing iPhone users to scrawl messages on the virtual steamed-up screen of their phone, complete with droplets of condensation and squeaky sound effects – and made £40,000 from sales. Joel Comm developed iFart, which in its first few weeks earned him £5,000 a day. It allowed you to use your iPhone to make farting noises. Classy.

More recently, the most popular apps are those that enrich the users life in rather more sophisticated ways – or at least take the edge off some of life's (admittedly petty) problems. Hence, then, the success of an app such as Tube Exits or the free app Urbanspoon, which uses GPS to provide you with a list of restaurants near where you happen to be. It also allows you to check reviews of the restaurant before booking. Now, you can use an app to do the shopping, play a musical instrument or type an email as you walk along the street without getting (justifiably) filled in by oncoming pedestrians – see panel overleaf. Annoyingly, there was also, for a while, an app that enabled you to find train times while out and about. But, if you go to the website, you'll find only this message from the nameless developer: "I'm afraid National Rail Enquiries have asked us to take down our site, as we are using their resources server without permission." Shame.

What's especially striking about apps is how quickly they have become moneyspinners for Steve Jobs, founder and CEO of Apple. When the iPhone was launched, there were many sceptical voices. It was too expensive, too readily nickable, too much of a triumph of what techies could do over what customers wanted to be for it to be a success. Apps have changed all that. Apple's net revenue from apps – it takes 30% of each app sale – could overtake YouTube in 2010, says James Mitchell of Goldman Sachs. But, in a sense, that is not what is really important to Apple. What's really important is the sales of hardware these products generate. The iPhone, after all, is the major reason Apple's App Store exists in the first place. And they are selling well. Earlier this month, announcing recession-bucking quarterly revenue figures (up 12% on the same period last year, and generating record profits of $1.23bn), Jobs said: "iPhone is off to a great start – we hope to sell our one-millionth iPhone by the end of its first full quarter of sales – and our new product pipeline is very strong."

Bizarrely, given Apple's success, the California technology giant declined to be interviewed for this article, but analysts such as Jack Gold at J Gold Associates point out that apps have made iPhones and iPod Touches more desirable than initially seemed likely. "It's a great thing for Apple, and has established a whole ecosystem around the iPhone," says Gold, "but I'm not sure how much money the developers selling applications on it are making." Indeed, this is the most resonant aspect of the story: people such as Lance Stewart with a clever idea can get their apps developed in a cottage-industry milieu, but it is still the Apple empire that benefits most from their work and that seems zietgeisty and counter-cultural by association. Some 90% of apps don't make profits for those who create them. Apple would not tell me how much money it makes from its App Store.

Many apps are free. They seem, then, to demonstrate the truth of the freeconomics thesis developed by Chris Anderson, editor of Wired magazine, whereby consumers will have less and less cause to dip into their pockets to pay for product since the price is borne by advertisers. And this has happened with apps: advertising – to which apps users are exposed – bankrolls both Apple and the developers. That said, a recent survey found that most free apps don't make any money. Why? Because 54% of free apps have fewer than 1,000 users and as a result advertisers don't care to have their wares displayed before such meagre audiences. What's more, a large proportion of apps are bought or freely downloaded and then hardly ever used. Apple's business model seems to rest precariously on faddy customers' tastes.

Apple is ruthlessly astute in protecting its business model. Right now, it is considering whether to allow Spotify, the Stockholm-based music streaming service, to run an app on iPhone. It is a tricky issue for Apple because what Spotify plans to offer iPhone users – an unlimited on-demand music service – competes with Apple's own iTunes.

Simon Oliver's story typifies how app development has fostered creativity. Oliver dreamed of being a video games developer, but never managed to succeed in a cut-throat, heavily competitive market. Then he realised that he could design games as iPhone apps: the entry costs were lower and the competition less intense. He developed a game called Rolando, posted it on YouTube and was as a result approached by a games company, Ngmoco, which develops games apps for iPhone. Oliver says that the low barrier to entry means "that almost anyone with an idea can get their content out there".

Games apps, though, don't dominate the App Store. "There has been a shift since the App Store launched just over a year ago," says Stewart. "Originally the most popular were games devised to fill up the empty minutes of our lives or daft apps like the one that fogged your screen. Now, more and more, the successful apps are ones that actually improve your life or iron out real-life wrinkles." At this point in the interview, Stewart yelps loudly. He has just been informed by his ECB (English Cricket Board) app that Australia have lost another wicket in the test match. Whether that app has helped him with his life is a moot point.

But Stewart makes a good point: lifestyle apps are the new thing, and perhaps the only thing that will make the fad for apps endure. One indication of how apps are mutating came the other week on Top Gear, when Stephen Fry disclosed that there was a new app for cruising gay men. Called Grindr, it uses GPS technology to determine your exact location and gives you data on other cruising gay men nearby. "Guys into other guys are just a quick download away," says the blurb for Grindr. If you're new in town, the blurb adds, Grindr can help you find Mr Right or Mr Tonight. Hopefully it also helps you to give wide berths to Mr Wrong and Mr Never.

It's not just libidinous gay men who are finding that iPhone apps can appealingly finesse their lifestyles. The Catholic church has an app called iBreviary, which "allows the believer to pray simply via an intuitive interface", according to a communique from the Vatican's Council for Social Communications. iBreviary, which is free, is updated with prayers each day. There is also an app that keeps its users updated with the pope's recent speeches, so if the pope condemns gay social networking apps such as Grindr, they will probably be the first to know.

My favourite religious app is iBlessing, which is billed as "keeping you kosher via iPhone" and tells you the correct prayer to recite in Hebrew over a particular dish. Another Jewish app called Siddur uses the same GPS technology to give prayer times. I also like two Islamic apps: Ela-Salaaty reminds Muslims when to pray, while Face Makkah also uses GPS to tell you where Mecca is in relation to you, so that you can kneel in the right direction during prayer. The same GPS technology is also behind an app that enables you to find local marijuana suppliers. The $2.99 application, using information from the iMedicalCannabis.org website, aims to help people locate legal medical suppliers in the US.

Apps have often crossed the line between the sacred and the profane. There was a free app called BeautyMeter, which let users upload photos of themselves that were then rated by others. It was removed by Apple when the image of a topless and mostly bottomless 15-year-old girl appeared on the app last month. Apple also acted quickly to suppress Baby Shaker, an app that, for 99 cents, featured the image and sound of a crying baby. You shook your iPhone and the drawing of a crying baby would be replaced by a calm and silent one. "Not only are they making fun of shaken baby syndrome but they are actually encouraging it," said Marilyn Barr, founder of the National Center on Shaken Baby Syndrome. "This is absolutely terrible."

Then there was an app called I Am Rich designed by satirical German developer Armin Heinrich. Once downloaded and activated, it displayed a glowing, red "ruby" on the user's iPhone screen – an enduring testament to the owner's lack of taste and their excess of wherewithal. Heinrich wrote in his App Store description: "The red icon on your iPhone or iPod Touch always reminds you (and others when you show it to them) that you were able to afford this . . . It's a work of art with no hidden function at all." Reportedly, eight customers paid $999.99 for I Am Rich, before Apple decided to withdraw it from the store.

How will apps evolve? Michael D Cohen, founder and CEO of the Cohen Research group, argues that the quality needs to improve. Many, he says, are poorly made and therefore disposable. "Low prices lead to poor-quality applications, limited applications, and others that are in such poor taste they hurt the Apple brand and everyone who is developing for it."

It's striking that one of the most talked-about stumbling blocks for the future development of apps is Apple itself. Apple's App Store has been described as being like a bucket. It needs to become more like an online supermarket, says Cohen, so customers can wander down aisles and select what they want, rather than stumble across it by accident.

Another problem is that many apps may be provided in future by other forms of hardware, thus depriving Apple apps of their USP. This is certainly the line taken by Google, which expects to be offering similar apps through its browser in future. Google's engineering vice-president Vic Gundotra told the MobileBeats conference that the App Store trend is just a fad.

But Google would say that, wouldn't they? And the two technology giants are currently facing off over an app called Google Voice, which allows users to send free text messages and make cheap calls using Google's own number. Apple has banned the Google app from its store.

The worry, though, for Apple, is that Gundotra could be right and that its App Store is just a fad rather than a sustainable business supporting the iPhone platform. It's a point that applies similarly to Twitter. Both could be fun fads that will be over by this time next year. Among those who will be hoping this isn't true is Steve Jobs. But, for once, he won't have the last word on this. After all, the success of his iPhones depends massively on the success of apps, and thus on the creativity of people who aren't actually on his payroll.