He's talking about WGA... it's a completely unnecessary "update" that used to be classed as a "critical" update, that provided absolutely no functionality other then examining the PC and sending information back to MS on it (or maybe it simply notified the user itself that it was possibly counterfeit, I can't remember all the specifics)
nonetheless is caused such a furor that MS reduced it to a "Important" update.
The windows update program, which examines the local PC to see what can be updated, runs on the local machine- in a similar fashion to minesweeper. WGA, onb the other hand, would for most PCs be installed and run silently by pushing it through their update system, despite it being completely unnecessary from the perspective of the end-user.