Application Development is not the whole story.

My point is that if Canonical start diverting revenue from their upstream projects, not only does that put them into a position of competing with a community they should be collaborating with, it's also a poor signal to send out to people who might want to develop apps, have them available in Ubuntu, and (shock) want to earn money off them.

This is the issue. This type of behaviour pits Canonical against other members of the community, and effectively puts them into competition with their upstreams. Rather than enlarging the market and creating value, they're attempting to grab share and destroying value. This simply is not a healthy situation.