This won't apparently block the writing of MP3 files at the filesystem level or anything quite like that, but will block recording with Microsoft's bundled tools; their hope is to make all the unsigned garage bands release all their stuff in proprietary Windows formats (after all, who cares about the 0.01% of the market who don't use Windows? Translating the lyrics into Urdu makes as much sense as supporting non-Windows platforms), thus consigning MP3 to a a historical footnote. (It would work better if they automatically degraded the playback of MP3s; though that may be in the next release.)
Though doesn't everyone use WinAMP or Sonique under Wintendo anyway? (I know I do on the NT machine at work.)