This makes an interesting development. I wonder if MS is going to come out with some form of XAML-HTML5 converter to support the developers who have devoted significant resources to Silverlight on the web. Silverlight *is* Microsoft's tool for Windows Phone 7 development so that's not an entirely lost investment.
Personally, I love XAML and use it for client development. WPF is far superior to WinForms but the loss of Silverlight as a long-term "supported" web tool isn't going to sit well with many.
TechDays Ottawa is coming up - it will be interesting to see how this announcement plays out at it. I'll be speaking on using Expression Blend and SketchFlow for prototyping but I certainly won't be focusing a lot on Silverlight as an application platform - WPF for clients is where it's at.
Update: Here's a good article that compares MS' new strategy to the Apple HTML/Cocoa strategy.