I happen to agree with him in theory: I think it's a huge missed opportunity to force the browser to be an application delivery mechanism instead of a content-delivery mechanism (or "object"-delivery as he puts it).
But of course in practice, there are historical and political reasons as to why web-as-an-app-delivery-mechanism happened, not least of which - if we took Kay's example of MS Word - is Microsoft's unwillingness to open up the platform (or proprietary software, in general). So we had to re-solve these problems in non-proprietary ways, while forcing proprietary app providers to conform to web standards that would ultimately and perhaps knowingly cannibalize their software sales.