Okay, you brought up a lot of point and asked some good questions. I'd like to first respond in the form of a question:
What the hell are you talking about??!!?!
I don't see anyone proposing that software piracy be decriminalized, or that all forms of copy protection be outlawed or any of the other strawmen you have mentioned in between. When a film studio releases a DVD they have spent hundreds of millions of dollars and recognize only a few dollars per sale, they use nothing more than simple copy protection on their disks. Music CDs are the same way. Contrast that with the hundreds of dollars spent on other forms of software that run on a computer that use simple activation codes. Why is it that game studios alone feel the need to use far more intensive DRM? I don't actually own the rights to the movies, songs or software on those disks either, but I can still use them unhindered by a third party.
I never said anyone said piracy should be decriminalized, or all forms of copy protection should be outlawed.
Also there's much more hidden background security in DVDs and Music CDs then simple copy protection. There is region locking which is probably the biggest, there's also small programs that detect if you have DVD burner software installed on your computer like Alcohol 100%. I would know I've had to deal with this before, I burn DVDs of stuff I make on my computer and have been told many times when trying to play a music CD or a Movie DVD that I cant because I have legal burner software. Then there's stuff like Itunes. Should I need Itunes to put stuff on my ipod? nope. Should Itunes be collecting my local information? nope but it does. Movie DVDS and Music CDs have just as much stuff in the background working its just less obvious becuase it usually works less often then video game protection.
The way you cut down on piracy, like with all crimes, is to punish the guilty. Stores know that there are shoplifters in their area, what do they do about it? Well they could do like game companies and hire a team of security guards to accompany each shopper as they go through the store. This would not in any way be illegal and therefore, according to you, not be wrong in any way. If they truly thought like game publishers they would see the subsequent loss of sales as confirmation that more shoplifters exist and there fore they need more stringent security. Fortunately store owners are smarter than that and realize that the best way to combat shoplifting is to put up some cameras and some signs that threaten full prosecution for shoplifters.
Software piracy continues to run rampant because the odds of being caught and prosecuted are minuscule.
But there is a different between stores and games. Stores can as you say just hide cameras becuase they own the store. You can't do that in video games becuase DRM installs itself into your PC they may own the game but they don't own your PC. You can't hide DRM, doing so causes a lot of legal problems. One of the main reasons EA got sued over Securom is becuase they tired to hide it then when people found out that there was this hidden background program that installed itself into your OS they flipped. DRM will be this visible annoyance becuase making it invisible causes more legal problems then making it visible.
As you said software piracy continues to run rampant becuase the odds of getting caught are small. That's why we need things like Steam. When faced with the possibility that illegally downloading games might cause you to lose access to your other games, people are less inclined to do it.
Gabe Newell has said repeatedly that Steam exists as a way of making games a service rather than a simple product. Wherever there exists a service there exists the possibility of a denial of service. Steam has the ability to cancel any members service at any time, the member need not have broken any laws to cause this. (I don't know where you got that idea) If a member purchases 100 games and follows the EULA of every one then why should Steam be able to take them all away for reasons that have nothing to do with any of those games? This would be like me getting in the express lane with 21 items instead of 20 and suddenly the store then comes to my hose and takes everything I ever bought from them back.
I know of a lot of people who have gotten banned form Steam and the only reason they got banned was because they hacked, or broke the EULA and if they got banned becuase someone hacked them and then used their account to hack all they had to do was tell Valve and they reactivated their accounts. Now If like Activision-Blizzard was running Steam I would see this as a issue, but Valve, a privately owned company who does everything in their power to get prices cut for customers, fights for free-content across platforms, and whose know to be fair and just in their dealings I don't see the problem.
With any form of protection from Disk checking to Online Validation to Steam there always exists the possibility of someone just shutting down your ability to play the game. If game companies used a Periodic Disk Checker Program or Online Validation Program to make sure your game was legit they could one day set those programs to deny your disk if they so chose to. Could Valve just shut you out one day for no reason, yes. Would they, no. As long as you play the games and don't break rules they have no more reason to just shut you off as Bethesda would to have just randomly change the online authentication tool on a non-steam game to do it also. Also considering the legal [censored]storm they could get into it probably wouldn't happen. That's not so much a problem with Steam as it is a problem with all form of DRM but does that mean DRM in general is bad. No. it just means it has a flaw like everything else in existence.
Everything in existence can be abused. Does that mean everything is abused? No. As long as you have the right people behind it you have no reason to fear it and considering what choices we got, EA, Activision, Ubisoft, Valve. I would say we got the best choice.
As to what happens if/when Steam goes away. I've heard time and time again that there is the contingency plan you mentioned, but only from nameless faceless users on forums, boards and blogs. I have never seen anything even remotely official from Valve/Steam. They may in fact have a plan in place, but unless they officially state that it exists and the conditions under which they will enact it, then they are under no obligation to ever use it.
As for the "official" quote were Valve talked about their plans in case of a failure, I cant remember where I saw it since it was back in 2006 when they talked about this, however moderators on the Steam forums who are picked by Valve themselves have said they would just switch Steam as a whole into the offline mode that's already built into the system that you can use yourself right now. You would still have full access to your games, that's why offline mode was put in in the first place so if you cant connect to the internet or steam servers for any reason you can still play your games. Ive gone entire weeks in offline and played my games like no end and had no restrictions placed on them.
http://forums.steampowered.com/forums/showthread.php?t=870603&page=2