Windows 7 Media Player and Windows Media Center will block the usage of third party video codecs. That news spread like wildfire on the Internet after the discovery that the latest semi-public builds of Windows 7 were indeed restricting codec usage in those two programs.
Rafael got an official response from Microsoft regarding that rumor which basically states that Microsoft will not limit third party codec use in Windows 7.
As we move toward the release of Windows 7, we have worked to add more codecs and file types to allow for a better user experience. We also allow Microsoft experiences to use codecs and other format technologies from third-party companies, just as we always have. Third party applications can use the Microsoft codecs or their own. Microsoft does not restrict the use of third-party codecs.
Blocking third party codec usage in the pre-release candidate builds of Windows 7 might be a way to test the newly added codecs in the operating system.
Still it is good to know that the blocking will not be carried over into the final release of Windows 7.