IMHO this is sending a strong signal to people like myself who mainly use an iPhone for privacy reasons. Regardless of whether or not the data is only stored encrypted at the 3rd party, their willingness to compromise in this regard is a strong indicator for their future actions and their commitment to privacy and security.
Personally, I see this as a positive development, as it signals that the company is doing what it claims to, promoting the PRC to get the same accommodation that Office 365 delivered versus giving the state the level of access it demands.
If you feel strongly or have a requirement to control your account principal, you should not be using a third party identity store.