And what did MS do? They disbanded the IE team and sat on their asses.
I'm inclined to agree with this assertion, if only for the fact that MS has cycled in and out of browser dominance, historically.
What's interesting to me is that IE4 won for all the wrong reasons, and it looks like IE6 failed for all the right ones. It's real easy to see how MS could massively fail or succeed through their acceptance of standards, but I agree that tho they are teetering now, that doesn't necessarily indicate any future position.
I don't disagree with your larger point. In my opinion as a web developer, IE7 and 8 are horrible browsers. My point is that Microsoft is more likely to rebound from this situation than to go out of business or become irrelevant.