I'm not entirely sure that IE only became successful because it was bundled with the OS. In many ways, it really was the better browser. It rendered faster than Netscape, its UI was for the most part cleaner, it introduced innovations like the XHR, and it was even more standards-compliant. (Shocker I know, but does anyone remember trying to do DHTML with Layers in Netscape 4?) The reason I switched from Netscape 4 to IE5 wasn't that IE5 came with my computer (the first thing I did with a new computer was to download Netscape anyway), it was that Netscape 4 flat out hung when I tried to visit many websites.
Microsoft also did all this shady stuff with bundling it into the OS because that's apparently how they operate, but I'm not actually sure this made all that much difference in winning. It certainly wasn't what won me over.
I hate Microsoft, but there is a lot of truth to what you say. IE 4 was clearly better than Netscape 4. And IE 5 better still. Then they rested on their laurels.
IE 4 was better than Netscape 4, but the average user - the vast majority of not-terribly-technical sorts - goes with whatever's on the computer to begin with. Microsoft probably could have won the browser war (albeit much later, and less completely) simply with bundling a not-quite-as-good-as-Netscape browser.
Microsoft also did all this shady stuff with bundling it into the OS because that's apparently how they operate, but I'm not actually sure this made all that much difference in winning. It certainly wasn't what won me over.