A major reason that CD's stopped being used is the straight up lack of optical drives on modern computers. In most cases these days you specifically need to look for a device that includes optical or other physical media that is not USB.
Given the ubiquity of internet access in most markets where computers are sold (even in developing countries), it is very reasonable to expect that even as a last ditch, the user will be able to connect to the internet on a tethered cell phone, and this is reflected by the fact that on consumer OS you can specify that a connection is metered.
A proper windows CD would have allowed people to wipe all that out and just have vanilla windows. Microsoft weren't interested in that.
Not all hardware is as friendly as Linux on a Thinkpad... Sometimes a clean install would leave you without a display, or would put some bizarre peripheral in an unusable state.
Haven't heard that, but haven't paid much attention to windows since c. 2000 - I believe it's more stable and secure now than it was in the windows 98 days.
Why not have a "reset to clean install" option in windows, which resets everything to just the installed state? Why not distribute the windows CD with the machine so the user can reinstall?