Because of convenience. Updates and new features are added automatically, and the developers only have to deploy a single copy to know that everyone has the latest features and bugfixes, instead of having to rely on people updating their local copies. And as long as you have access to a computer with an Internet connection, you have access to the apps you're used to.
Of course there are downsides, but local software has downsides too. It all comes down to your user profile, and for most people, Google docs has all the features they need. For power users, you have locally-installed applications with larger feature sets and harder learning curves.
Also, with Google Docs I have full access to my content anywhere, on any device... and, again, all for free. Desktop software, in these respects, is hardly superior.