Actually, the difference between App and Application goes back way before the iPhone. Put simply, an App is a small program that is designed to perform a limited amount of functions. An application is a larger program designed to perform many functions. The MS Office apps on mobile devices fit this definition because they have a subset of the functionality present in the full applications. This definition has been in use (to my knowledge) since the early days of Java, which was used to write a lot of simple apps for specific functions.
That doesn't mean that the OS should really distinguish between them though. At least on an interface level (on a lower level, it often does need to, maybe it needs to spin up a runtime). All the user cares about is that he or she runs the given app or application and it does what he or she wants it to do.
Biting the hand that feeds IT
