When Silverlight was first released, it was inevitable that it would be compared to Adobe Flash (and Flex) because of its similar function. Although there is overlap between the two products, I don't think Microsoft's primary intention was to just launch a competing product.
Silverlight's development was the obvious offshoot of WPF, and there was no satisfactory technology for the Microsoft developer to create RIAs prior to its release. Options such as ActiveX controls or embedded Windows forms suffered from being difficult to develop and debug, were not cross-platform, and had security and deployment issues.
For a taste of just what is possible using Silverlight, take a look at the upcoming Microsoft Office Online application (http://channel9.msdn.com/posts/PDCNews/First-Look-Office-14-for-Web/). Office Online utilizes Silverlight to provide online versions of Word, Excel, and PowerPoint.
Perhaps the biggest advantage offered by Silverlight is that applications can be written using the .NET Framework and existing Microsoft tools such as Visual Studio. This immediately lowers the entry barrier to new developers and gives them access to much more functionality.
Although Flash is almost certainly installed on more browsers than Silverlight, at the time of this writing Microsoft is in a strong position to encourage uptake of Silverlight (subject to future possible antitrust legislation!).
It is hard to get accurate statistics about Silverlight uptake, but the sites www.riastats.com and www.statowl.com/silverlight.php are well worth a look. At the time of writing, they indicate that roughly 25 percent of browsers have some version of Silverlight installed. Adobe indicates that it has a much higher uptake, which is to be expected with a more mature product: www.adobe.com/products/player_census/flashplayer/.
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