News is in that Microsoft is cleaning out unauthorized modification of Xbox by blocking them permanently from Xbox Live.
If they are using pirated software? Block them.
If they simply modify the box with a bigger hard disk, then the case is not that clear cut.
Even with users of pirated software, I think it is too harsh to block the console permanently. A few months ban will do the trick just as nicely.
Moreover, it is just a matter of time someone find a way around the block. Let’s not forget people who modify the Xbox either is more technically savvy than joe average users, or have access to one.
There will be fall out. The biggest threat I see is those blocked Xbox are dumped onto unsuspecting buyers. Regardless of the fact that this is sololy a matter between the buyer and the seller, the XBox brand will be tarnished. At the worst the Xbox second hand market become non existance, and this can make it more difficult for Microsoft to sell their next generation console when it is time to produce it.