But it is a matter of hindsight. Microsoft was indeed very late to the game with Silverlight, but back then nobody knew that Flash was on it's way out. We knew that we hated full Flash websites but that's about it. Take a look at the following timeline.
2005 - Youtube was created. Adobe purchases Macromedia.
2006 - Kongregate was released. (Semi random example of a popular Flash gaming website.)
2007 - Microsoft releases Silverlight. Netflix starts streaming video online.
2008 - Hulu launches publicly
2010 - Apple releases the iPad, pushing Flash to the side. (Yes, the iPad was released just 3 years ago.)
And if we take into account the fact that Silverlight wasn't built in a day we could probably say that Microsoft started working on Silverlight before Youtube was born, during Flash's heyday, before HTML5 video was even an option, and half a decade before mobile devices started making Flash obsolete.
And let's not forget the fact that Silverlight is an extension of .NET and as a result it was a great competitor to technologies like Java Web Start.
Silverlight was dead on arrival because of the market penetration of Flash and it was killed a little later by tablets and by HTML5 and JS. But back then, for a short period of time, Silverlight made all of the sense in the world.