Scoping the Scenario
Without any security measures your connection string appears in plain text, and includes your login and password to your production database. The goal is to allow the code running on Windows Azure be able to read your connection string, however the developers making the package for Windows Azure deployment should not be able to read it. In order to do that, Windows Azure needs know the “secret” to unlock the connection string; however the developers that are making the package should not. How is this accomplished when they have access to all the files in the package?
From the SQL Azure Team Blog