Is this Legal?

Security Business Unit. No. Palladium. No. Secure Computing Platform. Lots of resistance from customers (and from partners, but I can't really talk about that here).

How is Microsoft supposed to fight against this?
asdf

DeDRMS - CLI utility for decrypting AES encrypted MPEG4 AAC files.
FairKeys - CLI utility for retrieving FairPlay user keys from Apple's servers.
JustePort - CLI utility for streaming MPEG4 Apple Lossless files to an AirPort Express.
PodKey - CLI utility for extracting FairPlay user keys from an iPod Key Store. .NET

Binaries:DeDRMS.exe
FairKeys.exe
JustePort.exe

(All of this, of course, is courtesy of http://www.nanocrew.net/blog/)