I'm sure they're trying, pragmatically, to solve the problem of providing the self-contained .NET development experience to the effort of creating web animation and RIA. Market share is part of it, but they've always succeeded in having a committed developer base by providing fairly comprehensive tools that make everything feel somewhat like Visual Basic (which they do remarkably well).
I would argue that such an approach is what makes me very queasy around ASP.NET, but that's another story.
IMO it's just a case of MS being late to the party (again).
Personally, I think it's good for Flash to have some competition, and I like the fact that Silverlight includes support for Ruby, C#, and F# for code-behind programming.
I also agree with the Windows is becoming less relevant part.
It's trying to solve the "someone else's product is more popular than ours" problem.