Most of the spokes are supplied by partners, Microsoft earns royalties, and the whole thing helps perpetuate the idea of Windows PCs as the central home entertainment device.
A lot of the Windows Live services are things that had already been in development by MSN,
Europe says you can't use one monopoly to compete in other markets unfairly. Microsoft argues that Windows is a unified product and no government should have the right to say what it can or can't include in the operating system.
This is definitely being driven by Microsoft's desire to position Windows as a home entertainment hub, and to do that they have to make some concessions. They're walking a line, trying to please both sides (content companies and consumers) at the same time.
They have to prove this year that Xbox 360 is going to be a money maker, because they have put a lot into it. Overall, I don't think there were any big surprises. Windows and Tools are going like gangbusters.