But basically the situation would have become more like android, instead of people getting their distributions from debian or redhat every PC manufacturer would have created their own distro.
Upvoted for a very intelligent reply and extremely insightful comment. The "Linux desktop -> Android" bit oddly resonates with the way things feel today.
Is this really worse though? Distros themselves technically work as the vendors in this case with "crap pre-installed" (Unity, anyone?) , depending on how cynical you want to be and your choice of distro. Install Fedora Core 9 and Ubuntu 11.10 side-by-side to see that difference in play.