Steam is a digital distribution platform that was originally developed by Valve. Steam provides a framework to download and manage your game library, and it even has a store feature with the newest pc game releases. It almost works like a variation of iTunes, but with games instead of music and movies.
Although it sounds kind of strange to the uninitiated, it actually works very well and has been tweaked and streamlined over the past couple years. As of this moment there are over 1000 pc games available for purchase and download through the Steam store, and they can now be stored in the cloud, so you will never lose them. Even if your computer fries, when you get a new one, just download Steam and your new games will be there waiting for you to play them.
And no, Steam does not make any game itself.