It seems to me that we need something like PDF, but that isn't so hung up on the idea of formatting physical pages. If I'm reading on a phone, I want it to reflow.

That's not strictly true. You can embed inline object data in object tags (http://www.w3.org/TR/html40/struct/objects.html#h-13.3) using the data: URI scheme (http://www.faqs.org/rfcs/rfc2397.html). Whether that is good enough, I don't know. The data needing to be physically inserted at each point of use certainly isn't great for space usage and performance.

But then, in the context of email, why not just use MIME?

(Not that that really alters the basic point, which was that HTML, by itself, isn't enough. The object tag might be a good enough solution, I don't know.)

Which is exactly what OP was complaining about. HTML documents need multiple files to work correctly. .DOC and .PDF provide this. There is no standard for HTML containters.

I believe that HTML is far more powerful than currently tapped.

Key term for this chapter is "than currently tapped". The problem is, .DOC and .PDF solve all the problems HTML documents have.

The take-home assignment is to make an HTML container that can be read and edited in software that everyone has, then convince the world (and hiring managers) that everyone should stop using Word even though it works perfectly fine. Extra credit if you make it as rich and feature filled as Word without making it more bloated than Word.

Yep, someone has to build a standard for HTML containers to contain documentary elements like Word/PDF have done so far.