There’s a lot of denial both from Microsoft and others about Silverlight being a Flash-competitor.
I’ve been watching the session videos from sessions.visitmix.com in the last few days. In one of the videos they show a survey that Microsoft commissioned that very specifically asked about future usage of Silverlight vs. Flash. The presenter made various comments about Flash TCO being much higher, etc.
I think it would very naive to think that Microsoft was not targeting upcoming designers and existing designers. The fact that Expression is pushed out now with XAML support (with a 2.0 version already in preview) ahead of XAML support in Visual Studio says a lot.