The problem is, that users were not notified that the software would be phoning home on a daily basis. Of course, anyone who has watched Microsoft for long enough would not be suprised at all by their Big Brother techniques.
It's one reason (among many) that I don't use their software, legal or otherwise.
OK, fair enough, but users are notified that the purpose of the software is to detect illicit copies of Microsoft products.
Second, the software is not installed automatically, and it is not required to get security updates. It is required to get freebies like anti-spyware.