Except they've never done that, so technically it's only legal because the system has worked so far. Never in the history have Steam have they ever just "cut someone off" without a reason. Usually if they do you're breaking the rules big time, and have been watched for some time or received a ton of warnings. Worse case scenario Steam someday runs out of money and they servers shut down locking everyone out of their games. I think at some point they were working on a way to get the games to people in the event that this happened, but no idea where those plans went.
As far as I know, Steam's plans are to unlock everyone's games in the event of catastrophic failure. I'd cite a source if I could remember where I read that, but iIt was in an interview with one of their execs some time ago.
My only complaint with Steam is their download time. It could just be my (censored) DSL speed, but I've never popped above 300kbs when downloading from them.
Agreed on the sales, though. I've picked up several games from my "want to play it eventually" list for around $5 or $10. Ought to keep me occupied for a while. Not sure if I like being reminded about how many hours I spend playing the games I bought, though.
On the whole, the client is not terribly intrusive. Some may have privacy concerns, though. I remember one of the execs at Bioware talking about how they were able to assess ME2's reception by looking at how players approached the game. She had figures on how many players had started from scratch vs how many imported their ME1 Shepard and how many chose a male vs female Shepard. That wasn't Steam's thing, but Bioware was able to do it because of the capabilities of Steam's client.
I'm not sure whether this is a good thing or a bad thing. On the one hand, if it helps devs build better games, then I'm all for it. On the other hand, businesses use information in ways that benefit them, but not necessarily anyone else. (and on the gripping hand, they could have just asked - couldn't resist, but most probably haven't read it) For now, I'm cautiously optimistic as to its utility.