You talk about user's going somewhere else if the service is bad, but that users are not able to determine if there are problems. There is nowhere else to go. The vast majority of users are locked into Windows with no real alternatives. The application server market at least has alternative providers. In the application server market, users only need a web terminal.
Application servers can run any operating system, any application.
It does not matter as far as the user is concerned. In this way the application server market offers real choice and weakens the Windows monopoly. There are many potential problems with application service providers, but there are many potential benefits. Interestingly, the Hotmail breach might be a case of the market functioning exactly as it should. Sadly, I doubt it.