You're bringing up all these theoretical counterpoints that either obviously don't apply, or only apply very partially. There are many local only, FOSS options available for every type of software, right now, many free, for people that care about privacy and control in their computing. They generally have tiny market share. If they were made even more convenient, I don't believe the impact would be substantial. By that I mean stuff like brand recognition, what friends are using, and so on would still be more important decision factors than privacy/control features.
This is a people problem, not a "free market not behaving like its theoretical model" problem. Either people don't fully understand the meaning and importance of their privacy, or their revealed preference of not caring that much is just... sadly... true.