An Application Environment represents a specific deployed instance of your application that you want operational monitoring for. For example, you may have deployed the same web application to Development, Test, UAT, and Production. Each of these would represent a different Application Environment.
An Application Environment has one or more Services - an individual application that provides a set of functionality as part of the deployed system. You might have just one service - like a single web site that stands alone. But, you may have many services in a complicated system that separates out background processes and foreground processes.
To setup an Application Environment:
A new service is automatically created for each distinct Application that sends data with the same Application Key. Each time data arrives at the server, it checks if there is already a service for the Application Environment specified for the Application Key. If there isn't a service for the Application specified by the session data, a new one is created and linked with the session.
If you are deploying components you don't want to roll into the Application Environment (like say command line tools or peripheral applications that are part of the system but you don't need to monitor) then don't specify the Application Key and they won't get aggregated into the Application Environment.