I agree with almost everything you said; I think the major flaw in your thinking was that it turns out that making a virtual appliance that can safely run on the open internet for 5 years without intervention from a SysAdmin is a whole lot more difficult than you'd think. If you could have predicted that, with the other information you had, I think that premium shared hosting (which is what PaaS is) with VPSs eating the low end, would have been the obvious conclusion.

I've thought quite a lot about this, in fact; for a while I was talking about starting a PaaS company that used the customer's equipment. As far as I can tell, the current model (where the PaaS company controls everything) is by far the easiest (thus, if sysadmin/programmer time is your constraint, the best) way to solve the problem.