I heard once that Steve and Co. early on envisioned the iPhone to work mostly with web apps through the browser, but when it became clear the tech wasn't going to be there they went the app store route? Anyone have anything that backs that up or hear the same thing? It's interesting that 10 years later we're still there ;)
So it really is a combination of things.
And of course once Jobs saw the App Store model, there is no turning back.