Is creating a mobile application actually a good business model

Lots of people I know think that their idea for an iPhone app is a great business idea, and could make them rich. I think it's a nightmare, akin to two-level pyramid scheme that generates revenue for the platform provider (Apple), while the little guy absorbs all the risk. Who is right?

This is my reasoning:

1. The market for mobile apps is so visible, that it's crowded with competitors.
2. Software developers are expensive, so the cost to prototype and build an application is high.
3. The risk is high; even after investing in the application, there's no guarantee that anyone will buy your product.
4. The market is fragmented between various platforms, so a completed application can only target a fraction of the total market.
5. Platforms like Apple will take a huge chunk out of whatever revenues you manage to generate.

My question: is mobile application development a gold mine, or a lottery?

It is not a "gold mine" or a "lottery". It is a business like any other.

Build something people will pay for and market it, you will make money if you execute well enough. Mobile apps are really not so different to any other software or any other business. Don't get hung up on Apple's cut, I know I wouldn't have bought 75% of the mobile apps I have bought if it wasn't so easy. If I had to find their individual websites and then pull out my credit card to make the purchase, I wouldn't. In my mind the app store more than warrants it's cut.

The points you mention are valid, but you can find the same type of list for any business.

I depends on the kind of your business. Actually the app can be profitable if you already have the user base. In this case you can increase their loyalty with an implementation of the mobile application. There are some situations when mobile development is possible, desirable, necessary, or simply a waste of time and money.