Does that language actually limit their legal rights?

The problem isn't that the ToS is written in legalese. They are all written in legalese. There is nothing evil about legalese.

The problem is that this company is assigning itself an unreasonable, unnecessary and unethically expansive set of rights to other people's intellectual property - essentially every right short of actual ownership.

That isn't such a big deal if we are talking about what you type in to the Google-search box; it IS a big deal when the whole point of the service is to provide backup and synchronization for your personal data. If you are writing a book, writing software, using the service to work on some tracks or digital paintings or photos, it is pretty darned likely that you would use such a service for these things.

Are there ways to avoid the problem? Sure, don't use the service. But this kind of clause is still poisonous and abusive and should condemned by everyone. This isn't necessary and it is wrong, Dropbox should stop or they will continue to see this kind of bad press.

Why would you trust any provider? Because there were reasonable technical and legal measures in place to indicate good faith and actually help prevent abuses. Because they had been tested for some time and found to have integrity. If I trusted Rhinofile, why would I trust it? Because it came out well under scrutiny and review, because I knew it fulfilled my purposes adequately, etc. Same thing for a backup service/cloud storage provider, as with anything else.

Just use a different service which supports encryption, AND doesn't assign itself all rights to all of your intellectual property

This is a wrong thing for a backup service to do. I don't grant Dropbox any rights to my patents, business plans, gay sex diary, my novel or the software I'm writing. It's legitimate to complain if Dropbox updates its ToS to give itself essentially every possible right over all my intellectual property I back up on their service. Only a fool would put anything really sensitive on Dropbox to begin with (particularly now), but the point is that this is very bad corporate ethics. It isn't a defense to say "everything is okay if Dropbox doesn't misuse the massive and unnecessary powers it is giving itself."

This is a TOS change. Many of those complaining on this thread have just closed their accounts in response to the TOS change

Again:

This lists pretty much every right other than actually transferring ownership, all purely to the extent that Dropbox thinks it is necessary for the Service. That's not paranoid, that's just reading what you are agreeing to.

Because that is what it says in the contract

Oh, wait...