What exactly would the EU be spending that money on? Where does this kind of punitive fine revenue go into? Is it the general slush fund, or is it earmarked for some purpose?

It's distributed to all member states in the proportion that they contribute to the EU budget, after all appeals are completed.

No it's not. It's contributed to the general fund of the EU.

If you fully follow the money, it's mostly used to make local EU agricultural products cheaper, and for the government offices and jobs in Brussels and Strasbourg.

They would build a really nice app store and then it would sit empty because it is not preinstalled and the network effects of Google Play make it pretty much impossible to gain any traction for an alternative.

The idea is that with microg as drop in replacement all the apps would still work without the play services and be as good as. Putting your app on this additional store would cost you just a click. The vendors can preinstall that and ship google-less phones.

It will not happen, but if they really care about what they claim to care about, this is what they should spend the money on. Not sure if just putting a few on Google will help to get a better, healthier market.