Full featured DEs offer features far exceeding what Windows 98 had: applets, advanced window management, 24bit graphics (Windows 98 icons were mostly 8bit) + transparency, a ton of convenient APIs. Coding in pure Win32 is quite difficult.
IceWM is far more advanced/usable than Windows 98 wrt window management (and better than modern Windows, since things like the TaskBar have regressed heavily).
True, but Delphi with its VCL showed it didn't have to be.
I remember a default Delphi application with 0 lines of actual code showing nothing but an empty screen compiled into something like 300KB circa 2000 all thanks to VCL while its pure C Win32 counterpart compiled into a few kilobytes.
Yeah, an average HTML page nowadays without graphics and built-in fonts is easily above 500KB considering all the embedded JS and CSS.
...And then you UPX it to shave some more bits. ;)
Today you can download the .NET runtime quickly and semi automatically, but back in the day you had to make sure the user had them, so you included them in the bundle anyways...
http://www.linuxfocus.org/English/July1998/article52.html
Compared to windows 3.1, the default theme flew, and visually, it was way ahead of Win 98. I remember getting pseudo transparency working, but I think that was in the pentium 100Mhz days. Other than that, it checked all the other boxes on your list.