Java (like Flash) was always designed as a plug-in, running side by side with the browser, not an integrated part of the browser. T
Just because Sun developed a Java plug-in doesn't mean that Sun's vision was ever that Java was primarily supposed to be used that way. Java has always meant to be used as a standalone programming language, and the percentage of Java development targeted at the plugin is absolutely tiny. Most of it is focused on back-end applications, websites, and the occasional desktop app.
I'm not sure where this "Java = applets" thing comes from, and it's especially hard to understand why software developers would think this given it's pretty hard to work in this industry for more than a few years without being given a Tomcat/etc application hosted in a JBoss environment to fix up.