From the blog post entitled Check out what we just added to Windows Live Spaces! on the Windows Live Spaces team's blog we learn

Videos, videos and more videos

You asked for it, we created it!  We’ve built more rich media capabilities into Windows Live Spaces so it’s easier for you to display your favorite videos on Spaces.  You can now embed videos directly into your Spaces blog entries.  Adding a visual element to your blogs can help you tell your story.  

For a long time, Windows Live Spaces has prevented users from embedding videos from video sharing sites like YouTube and MSN Soapbox because it didn't allow users to use object tags in their blog content. However it is now commonplace for users to embed Flash objects in their blog posts and even though there were security concerns, user demand has trumped them and the blogging landscape has changed.

I'm glad Windows Live Spaces now enables this but it does point to an interesting problem for me as a developer on RSS Bandit. Currently, we disable displaying embedded objects in content by default. Has the time come to change that rule? I know I changed my security settings in RSS Bandit so I can watch embedded YouTube on blogs months ago and even had to fix some bugs where it seems were a bit overzealous in blocking ActiveX controls.

It seems enabling ActiveX/Flash and Javascript in your browser are becoming mandatory if you actually want to browse the Web thanks to "Web 2.0".