I was wrong, writely does support hyperlinks and spell checking (as demonstrated by this posting), and they responded to my feedback very quickly. So it really is a very nice tool for writing blog posts. My experience as a very small sample usability test indicates perhaps that the UI design and help text should be tweaked a little to make the available features more obvious.
It so happens I am co-writing a paper with someone outside my company right now, so I think I will test to see if collaborative writing works. However he is on a Mac, so perhaps he will run into the Safari problem.
Update 2019-09-14: Note, Writely was aquired by Google and became Google Docs