Running Bioshock 1 in any compatibility mode gets the same results. I even changed proxy settings like 2K suggests and changed my default browser to IE like they said as well.
If I install the game and then bring up task manager to kill the install when it says "install failed to download the update, no modification to your system will be made" (which if I click "finish" it will erase the install) and try to run the game it will give me an error stating the install can NOT be found. But the "play" button is highlighted like the install is good.
I have downloaded the patch manually but then I have to find the exact file to install it into the game files. So I have no idea what's going on with that because it prompts me to find where it needs to install.
Bioshock 2 is working though, windows live is the stupidest thing ever.