I always assumed Service Packs were a way of "resetting" the version of Windows. Instead of installing Windows 7 then needing to immediately endure 2 hours of updates/restarts, you could simply install Windows 7 SP1 with all the relevant updates and patches already applied.

No, Service Packs sometimes even introduced significant new functionality. Mostly, any non-critical fixes would wait for a SP, to make testing easier.

I imagine that Microsoft will do for Windows what they do for other products like IE: Offer periodic "rollup" updates that apply several updates at once.

While I can't find a link, I seem to recall Microsoft moving to a "no new features" policy for Service Packs at (enterprise) customer request. This seems sensible, as Service Packs aren't merely "security rollups", but also product lifecycle checkpoints:

When a new service pack is released, Microsoft will provide either 12 or 24 months of support for the previous service pack, varying according to the product family (for example, Windows, Office, Servers, or Developer tools). When support for a service pack ends, Microsoft will no longer provide new security updates, DST updates, hotfixes or other updates for that service pack.[1]

[1] http://support.microsoft.com/lifecycle/?LN=en-us

2 hours? I recently had to install a Server 2008 R2 machine. It required a solid working day of applying updates and rebooting to get it up to date. I was astonished.

E.g., Surface ships with Office 2013 preview, they'll son ship out the gold version as an update.