"The browser became part of the OS with Exploder via a service pack (and it silently installed itself with AOL).
No experience with AOL, but sounds like AOL wanted to make getting online as easy as possible to gain a big user base. I think it worked pretty well.
I remember the ISP CD's carried Netscape installers, with Winsock and other software as well.
Back then (mid-90s) most people knew nothing about Internet except they wanted to get online for web and mail with their v.32bis (or slower) modems. That's 1.5 kb/s. Most people had zero means of downloading a browser without a browser. (I had the same problem way earlier with my first modem and no terminal software)
"Embedding the browser (an application, remember) into the kernel is nothing short of both stupid and evil."
Why do you think the browser resides in kernel?
"Bill Gates famously said that using any browser other than IE should be very painful and that was one of the things that got them into trouble."
I don't remember having any problems using Navigator/Communicator/Opera back in the 1990s under Windows 9x/NT. Except for crashes every now and then. (happened with IE4/5 as well)
"The OS should provide services for any application designed to run on top of it.
So, which OS encompasses this purist philosophy of yours, a barebones kernel with simple shell? DOS?