A MS engineer posted a lengthy blog post on why this is the case. The ridiculous time has to do with insane system state and dependency checking for every update and each one in history before it, since Windows Update allows you to add or remove every little update ever for the OS.

The Rollup updates that MS moved towards, even in Windows 7 now, is supposed to help this. However, a completely new solution is really needed to replace this antiquated one, like many other lingering parts of Windows.

Decompression. They probably weighed compression time vs file size and realized that every byte not downloaded is money saved on bandwidth.