This is going to be a much longer post than usual, as it’s going to cover a lot of ground.
The internet has been filled for quite some time with an enormous number of blog posts complaining about how Flash sucks–so much that it’s sounding as if the entire internet is crying wolf. But, of course, despite the incessant complaining, they’re right: Flash has terrible performance on anything other than Windows x86 and Adobe doesn’t seem to care at all. But rather than repeat this ad nauseum, let’s be a bit more intellectual and try to figure out what happened.
Flash became popular because of its power and flexibility. At the time it was the only option for animated vector graphics and interactive content (stuff like VRML hardly counts). Furthermore, before Flash, the primary video options were Windows Media, Real, and Quicktime: all of which were proprietary, had no free software encoders or decoders, and (except for Windows Media) required the user to install a clunky external application, not merely a plugin. Given all this, it’s clear why Flash won: it supported open multimedia formats like H.263 and MP3, used an ultra-simple container format that anyone could write (FLV), and worked far more easily and reliably than any alternative.
Thus, Adobe (actually, at the time, Macromedia) got their 98% install base. And with that, they began to become complacent. Any suggestion of a competitor was immediately shrugged off; how could anyone possibly compete with Adobe, given their install base? It’d be insane, nobody would be able to do it. They committed the cardinal sin of software development: believing that a competitor being better is excusable. At x264, if we find a competitor that does something better, we immediately look into trying to put ourselves back on top. This is why x264 is the best video encoder in the world. But at Adobe, this attitude clearly faded after they became the monopoly. This is the true danger of monopolies: they stymie development because the monpolist has no incentive to improve their product.
In short, they drank their own Kool-aid. But they were wrong about a few critical points.