Just to add a bit of food for thoughts: in Mac OS X, you can completely remove Safari and replace it with your browser of choice. Protocol handlers will then be oriented towards the browser you install in its place (say, Chromium 2.5 alpha 1 "with Mac OS X extended support") and be done with it. Same thing, you take a current Linux desktop (or Solaris, or BSD, whatever) and you switch from Firefox to use, say, Gecko-based Epihany (Gnome), or a Webkit-based one, or KHTML (KDE 4) to Qt4's Webkit...
Not in Windows: if you try to remove IE, the system will restore the files. If you try to replace or otherwise modify the files, you need to hijack and/or shutdown the system files protection service (indeed, hack the OS). If you want to replace the components and obtain similar features (such as COM objects), you'll have to sift through huge amounts of improperly documented 'internal' properties. Thus, it is POSSIBLE, it has been DONE, but then you have to cherry pick the OS updates you apply because it will try (and more than probably trash your machine along the way) to restore IE instead of whatever you've exchanged it with.
The problem isn't actually that you should be able to choose which browser you want to use; it's more that you should be able to not run nor host a piece of software you don't want.
As for Windows Update, the update service that runs inside Windows does NOT depend upon IE: it scans currently installed patch sets, downloads a list of published patch sets online, compares the two and downloads the missing ones. Tools that can download data from a web site exist, they're not browsers: wget and curl, to cite only two. Both of these tools are very small (a dozen kilobytes each), and indeed, a simple front-end to download and install this or that browser would take an hour to write and would work beautifully: you'd get an up-to-date browser right away! No need to ship soon-to-be-outdated browsers, just a small utility and a GUI front-end, and there! You're done.
After all, it wouldn't be much different from the time when Windows shipped with installers for AOL, Compuserve etc.