Frankly I like the idea of having applications hosted in browsers... it's like zero touch deployment or one click deployment. The first few links in the post below are very good reads.
Loosely Couple wrote a while back a couple posts, Avalon: Microsoft's Microchannel and Rich clients, network wealth on why he believes that "applications will run in rich browser clients, and Windows will have settled into its legacy platform niche ... and Microsoft will be working hard to re-establish the market position of."
I was a little skeptical of this claim, but he did present a lot of evidence. There are a number of initiatives and products by various parties including IBM, Macromedia, Dreamweaver, and BEA to make browser applications as rich as desktop apps.
So, I'll buy into his claim that web applications will become richer and encroach into the desktop turf, but I don't feel that Microsoft needs to worry much yet, since the rich desktop will likewise get richer. In addition, Longhorn applications will adopt many ideas of the web as I mentioned in my earlier post.