I still prefer my term SPASM (Standard Phone Application & Services Model) to "Web OS" but the architecture looks the same. I hope Palm can validate (5 years later) that it was a good stragedy.
From my experience, Flash apps tend to look really good: rich, pleasant, and compelling. (I expect Silverlight apps to look and feel at least as good). On the other hand possibly EVERY web app I’ve come across using the web standards you mention (DHTML, CSS, etc…) just look and feel terrible. I use web apps all the time, just because they’re so convenient (usable from every computer), and tend to be FREE, but, dang, they look like crap when compared side-by-side with anything done in Flash or any standard desktop app. (I’ve blogged about side-by-side experiment recently at http://lastcomputer.blogspot.com/2007/05/browse...)
You talk about the relative failure of Java and attribute that failure to Java being a closed system for so long. But Java applications also tend to look just plain terrible, even worse than most web apps, and I think that is the primary reason we don’t see many java applets these days. The problem isn’t open/standard-vs-proprietary, it’s correct technology versus wrong technology.
Could it be that the web-app standards are just the wrong technology for making rich, pleasant, compelling applications?