The root of it was that Microsoft thought of the web browser as a kind of competing alternate OS-on-top-of-the-OS (which, in many ways, it is - the OS and browser each feature their own arguably duplicative/redundant UI frameworks, launching/switching mechanisms, etc). They didn't think this situation could last - either the browser would be subsumed into the OS, or the OS would be subsumed into the browser, or they would merge somehow. This belief was shared by others at the time (e.g. Marc Andreessen's famous declaration that the web would reduce Windows to "a poorly debugged set of device drivers"). So everything they were trying to do with IE and Windows was based on the intention that the distinction between them would gradually disappear.