The problem with this one is that at one point in the English language's history (17th/18th century I believe), the correct possessive form of "it" was "it's", which is arguably more correct^.

^You make nouns possessive by adding a saxon genitive to signify the distinct possessive-izing "s" sound. The word "it" is also made possessive with this same sound when spoken, but for the sake of a contraction (read: abomination ;)), we have decided to arbitrarily remove the saxon genitive and replace it with a simple "s". The excuse for this inconsistency is "well it is a pronoun, not a noun, so this is not an inconsistency" does not take into account that English is a language primarily spoken. Written English, where reasonably possible, should approximate the spoken constructs.

Demonstration:

  He stepped on the cat*'*s tail.
  He stepped on its tail.

Notice that although these two sentences are expressing the same idea and are of the same approximate form (they would be spoken similarly), the second has dropped the saxon genitive. This is clearly, if you look at it ignoring what you were taught in primary school thanks to Webster worship, an absurd change.

At the very least, people who use saxon genitives with the word "it" do not deserve the ridicule people like to heap on them. "it's"/"its" is not a "there"/"their"/"they're" scenario.