Fantastic article over at Joel on Software about "How Microsoft Lost the API War. It brings up some interesting points, specifically that web-based software is becoming more popular than desktop-based software. Well worth a read.
My personal take on it is that a happy medium will be found, where applications are hosted server-side but run completely on the client.
This is similar to the Java model but we all know what problems that has. It's possible that .NET is the solution to making this work well - it certainly has all the building blocks. I'll be keeping a very close eye on Mono because I see that pulling the rug from under Microsoft by causing .NET to be the runaway success they're hoping for - just not on their terms.