I don't think you have to activate Windows. Whenever that watermark has come up for me, I think I've just clicked on (paraphrasing) "remind me later", and I haven't seen it in a couple of weeks.
Your initial statement is
technically true. That said: your own experience described herein typically means that your installation of Windows was simply able to successfully auto-activate at some point, possibly even at the very moment that you gave it access to the internet. In the event that such activation fails, (such as what apparently happened to jacobp) the watermark is a visual indication that the OS has enacted a minor feature lock-out, preventing the user from customizing a small selection of Windows features such as changing the desktop background and customizing the behavior of the Taskbar. It's really just an annoyance more than anything else.
To my knowledge, the most common source of failed activations is OEM licenses, which can be obtained extremely cheaply from various internet resellers -- though, I'm pretty sure that such sales are against Microsoft's original intentions for those keys. Those OEM licenses are hardware locked; if the software thinks that enough hardware changes have taken place to conclude that the Windows installation has been moved from one "computer" to another "computer" then it will fail activation. Virtual machines/emulators are special cases where the word "computer" can't be taken to be a literal reference to the actual hardware; thus, any major changes to the emulation software are far more likely to create the kind of issues that Jacob has described.
Mind you, I can't speak authoritatively to the specifics of Jacob's version issues, but I can offer a wild speculation: Supposedly, Microsoft was going to stop supporting Windows 7/8/10 upgrade keys at some point; it's possible that Jacob was simply using an older key, and Microsoft's changes have finally taken effect. Compound that with the OEM license "hardware change" detection feature, and we may have discovered the trigger for the specific timing of his issue. In which case, the obvious solution is (unfortunately) to buy a new key.