Actually, I would adjust this slightly.
First, as Apple, I would take a weed whacker to the store and remove huge swaths of duplicate applications. I'd pick three to five apps for a particular category, based on the product and the developers' fealty to Apple. Apple doesn't want developers just dumping applications. Apple wants their customers to have a support mechanism for apps, they want the developers to quickly support iOS updates, etc. So the idea is that having your iOS App in Apple's App Store is a badge of honor for all of the various Apple users out there. Apple will also assist with marketing.
What about everything else?
Second, introduce side-loading. Apple might think your app sucks, but you believe in it. So you can sign a deal with a different non-Apple-labeled store. Or you can distribute it yourself. You'd still have to sign the application with a certificate from Apple creating, in theory, a paper trail if something goes wrong. Users might also get the appropriate warnings ("You're running an app from the Internet that could trash your phone, eat your children, and destroy the universe. Are you really really sure you want to do something so dangerous?") to try to...uh..."warn" them of the potential issues.
So, yes, you can sell your strip poker game, fart box, smuggle illegal immigrants game, or whatever App you see fit. Apple gets it's $99 from the developer for appropriate certificates but Apple doesn't get any of the action from sales.