They make money by selling ads to other mobile startups, which in turn are funded by venture capital because of the revenue they can make selling ads to mobile startups... uh oh.

Have you seriously never actually used one of those apps e.g. Candy Crush or Clash of Clans ?

Yes they are free. But they gamified in app purchases extremely well. I know of CEOs and accountants who have dropped $50-100 on games like this who have never touched a computer game before. It's pretty amazing to see.

It is a "fad" in the same way that Nintendo, Blizzard, Valve etc are fads.

In-app sales.

There's an undying belief in the mobile app community that once you have a spot on user's screen, you can cross-promote other products, so the customer lifetime value is higher than 99c. That didn't work for Rovio (with Amazing Alex), but so far "a growing ecosystem of apps" is a business plan for a lot of those startups.