There is space for both types, and web apps are not going to replace desktop apps.
I do think there are limitatations to running in a browser; World of Warcraft isn't likely to do so anytime soon. But I don't see any reason to believe that more apps need a desktop environment than don't. Rather, I see web browsers gradually getting more and more capable (especially within organizations that can make the choice to skip IE compatibility).
Sure, web-based application sacrifice A LOT. But in return you get dead-simple, cross-platform, accessible (sometimes), no-install apps. What would the GUI developers of 20 years ago trade for those benefits?
I'd like to know why you think this is true.
That observation may be true today, but it is getting less and less true every day. The evolution of technology infrastructure over the past decade has been in the direction of making web applications more and more powerful. (Javascript, Flash) The overarching trend points to web apps taking over the domain of desktop apps inch by inch.
Name any popular desktop app and I can more likely than not point to some company or other porting it to the browser.
We have seen that browsers are getting better at rendering JS, i.e. Google Chrome and Firefox 3.1, meanwhile functionality such as Canvas introduces possibilities of creating more elaborate apps that might require photo editing etc.