It seems that every retelling of the great NS/MS browser war seems to be laden with historical revisionism.
First, bundling the browser with the OS was absolutely the right thing to do, there's no greater indication of this than that every single modern operating system comes with a bundled web browser. MS may have been guilty of a lot of other anti-competitive activity, but decrying the bundling of the browser with the OS is just silly and naive.
Second, people seem to misremember just how crappy Netscape was then. Netscape 4.x was a travesty, it was buggy, slow, and crash-prone. IE 4 really was a better browser at the time (honest). People complain about the problems of supporting IE6 today but supporting NS 4 was so much worse. Not only was it far less standards compliant than IE at the time (if you could imagine it) but simple things like using an external style sheet could cause the browser to crash reliably. We know now that much of these quality problems were due to AOL mismanagement and a completely unnecessary full rewrite of the browser core, nevertheless, such was the state of browsers at the time.
Fortuitously, MS woke up to the importance of the web, started putting real effort into IE development, bundled the browser with the OS, and used a few other dirty tricks at just the right time when Netscape was floundering. IE dominated the market shortly thereafter, but such a dramatic change in marketshare was possible only because Netscape was not a serious competitor at the time. Netscape development continued to flounder until eventually they just gave up and decided, like SCO, to pursue their futures in court rather than in the marketplace. They gained a partial victory in court but it was utterly meaningless as they had lost to such an astronomical degree in the market they had no hope at that point. They dumped the mess of code they had on the open source community which spent several years working on it before it was even remotely worthwhile, and they ran, eventually completely killing their entire brand (an impressive achievement).
Now we see, though, that quality browsers like FF, Chrome (and to a lesser extent Safari and Opera) can and do compete against a bundled browser like IE. IE is still losing marketshare while FF, Chrome, and others continue to build it, over time this will add up and IE may yet be dethroned in the near future despite all the purported insurmountable advantages of OS bundling. I suspect that these trends will only accelerate, as the tech-leaders of today shun IE as their personal browser and IE is very far behind in supporting not only the web standards of today (e.g. css 2) but the quickly approaching standards of tomorrow (css 3/html 5/ws/etc.) When you can make nice looking boxes with rounded corners and drop shadows that work for FF, Chrome, and Safari users with 5 seconds of work by adding 2 lines to a css definition then the cost/benefit differential for supporting different browsers starts to change dramatically, with IE very much not on the winning end of that equation.