I'm sure the technical and emotional arguments that Flash sucks had an important role to play in why Apple didn't include it, but I like to think it's almost simpler than that: Flash expects (and often requires) the traditional keyboard and mouse interfaces. The iPad has neither.
Sure, the big Flash sites like YouTube could easily get away with translating touches to clicks and it'd probably "just work" for them, but how do you handle the millions of sites that depend on rollovers to reveal menus or full keyboards to control game characters? You can't. There's just no elegant way to translate that to the iPad.
HTML/CSS was designed to degrade gracefully in the face of changing client capabilities. Apple can more freely create a new environment that can still acceptably display HTML/CSS content because of that core design decision. Sure, some sites will do things that break even on an iPad (or iPhone or Android - there's no right click, still no ever-present keyboard or mouse, unusual screen resolutions, etc.) - but for the vast vast majority of HTML/CSS sites, the necessary information is still conveyed or available in some useful way almost by default.
I'm pretty tired of hearing reasons about why Flash isn't included ... and while I'm happy for HTML5, it's pretty sad that Apple doesn't give this choice to its customers. To make matters worse, I don't think Apple allows modifications to Safari on the App Store.
The web was built on top of such technologies (Java, Flash, ActiveX) and while all of them where a PITA in the long run, back then it was the only way to work-around the browser's limitations ... competitive third-parties are driving innovation, not standards, and definitely not monopolies.
Imagine if Microsoft controlled what software gets installed on people's computers ... today we wouldn't have had neither Java, or Flash, or Firefox, or HTML5 for that matter, and AJAX would have been a second class citizen.
I don't want such a future. Of course, I trust the market enough to make the proper choice when the time comes. People aren't stupid, and unfortunately for control freaks, the genie is already out for openness.
But it saddens me to see such positive reactions from people that benefited so much from openness (like DHH). Even with all the viruses, spyware and spam flying around, it's still a better present that what could've been if the PC was locked.
From what I remember, Java and then Flash were used extensively for games (ever since Netscape incorporated Java applets), and XmlHttpRequest originated in ActiveX, which was and is still is used extensively for corporate-intranet apps. The kindergarten my wife works for uses web-cams with an ActiveX app that's transmitting live images to parents (in 2010).
And streaming audio/video really happened with Flash, although it was possible with Java applets and ActiveX.
In my country we have saying ... it's like you haven't eaten garlic, and your mouth doesn't stink.
I'm fairly sure this problem of traditional inputs has nothing to do with Apple's exclusion of Flash.
Many web-sites also use ui interactions like mouseovers and there are many bad designers that fail to make their sites degrade gracefully.
Following your logic, Apple would ban web sites as well because they might not just work.
Now let me check-off 'Dead horse thoroughly kicked' from my list of things to do today.
Sure, the big Flash sites like YouTube could easily get away with translating touches to clicks and it'd probably "just work" for them, but how do you handle the millions of sites that depend on rollovers to reveal menus or full keyboards to control game characters? You can't. There's just no elegant way to translate that to the iPad.
HTML/CSS was designed to degrade gracefully in the face of changing client capabilities. Apple can more freely create a new environment that can still acceptably display HTML/CSS content because of that core design decision. Sure, some sites will do things that break even on an iPad (or iPhone or Android - there's no right click, still no ever-present keyboard or mouse, unusual screen resolutions, etc.) - but for the vast vast majority of HTML/CSS sites, the necessary information is still conveyed or available in some useful way almost by default.