I agree that they have the right to ensure that people are paying them fairly for the software that they use.
However, my main gripe with product activation is not its existence as such, just the fact that it leaves you no longer in control of your own computer. If you upgrade your hardware, you have to get Microsoft's permission. If you decide to move your legally purchased Microsoft OS onto another machine, you have to get their permission (and in some cases as we've seen, they'll just decide not to give it).
Even, as I've discovered from product activation on Windows 2000 Terminal Server, if your reinstall the OS on the client PC.... you have to ring them up and get permission! [1]
This is all to say nothing of the obvious massive privacy invasion that Microsoft are mounting with a combination of product activation, Media Player unique serial numbers (and its reporting back to them every DVD you watch...), Passport, MSN, Messenger - the list goes on.
Do you feel comfortable with Microsoft keeping a database of everything you do with your computer?
[1] This is non-trivial. You cannot do it over the Internet, you must do it by phone - you have to give them a 30 character alphanumeric code and they give you a different one back to confirm. Takes between 10 and sometimes 20 minutes depending on how many times you have to read each other the codes to get them right. Considering we have to reinstall at 1 PC a day, this takes a significant chunk of otherwise productive time.