At least in the existing implementations (Firefox's Ogg Theora and Safari's H.264), a plugin isn't used to play back content in a <video> tag; the necessary codecs are embedded in the browser itself and video becomes a first-class citizen on the page, like
images or text... Mozilla has some pretty cool demos where they do CSS transforms and animation on running video.
It isn't quite true that Safari includes the H.264 codec within the browser. Technically, what Safari does is that it connects to QuickTime and uses the QuickTime engine to play back the video.
There are already QuickTime codecs for Theora, but the problem is that Apple refuses to either include them or reference them at all on the web page for QuickTime codecs on Apple's website.
Mozilla does actually include the codecs within the browser code. Easier to maintain for them, from what I guess. I have no doubt that Microsoft will never include Theora support. As far as I know, the only time Microsoft ever acknowledged that Ogg codecs
was when they included Vorbis in the original Xbox, I don't even know if Vorbis is used in the Xbox 360.
Google has pretty much been fence sitting on the whole matter, given that they advocate H.264 through YouTube, while not actively dissuading Theora usage. Additionally, Chrome is currently using the ffmpeg engine to support <audio> and <video>.
One way that Silverlight could actually best Flash would be if Silverlight was made into a usable fallback engine for <video> and <audio> as supported by Mozilla Firefox. Of course, I doubt we will see it anytime soon. Maybe in Moonlight, when it gets ported
back to Windows.
Flash and Silverlight, in their current states, are rather unreliable in the browser. Plus, they kinda bypass the browser security model, given that they are both plugins. The only possible exception to the rule would be Chrome, since it isolates plugins
in a separate process, but I don't completely understand how that works, so meh....