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Whenever I hear about mod chips for pirating games, I think of this story:

http://www.actsofgord.com/Chronicles/chapter24.php

Gord! Forgotten all about that site. Apologies for the fluff comment but I’d recommend a read if you’ve got time, he’s a funny man.
Man, I accidentally spent an hour there. Thanks for the link though.
Its wrong to run pirated games. It's not wrong to modify your equipment in order to allow it to run unauthorized programs.
That is weird, especially given that modding console is completely legal over here in The Netherlands: using it to play games you don't own is illegal. I would've guessed Microsoft would target the users playing pirated games instead of playing on modded X-Boxes. Now it seems like they're also targeting users that prefer to play using a backup DVD instead of the original, which to me seems like a pretty fair use case.
Even disregarding the fact that most "backups" aren't backups up something the player has actually bought, there's also the fairness in multiplayer aspect that in my opinion would be a reasonable reason for disconnecting - with a modded box you can run modified software that can give you unfair advantages (for example). But the "backups" are the main target, of course.
This is not accurate - the modding in question in the article specifically only allows the playing of "backups" but still requires the game to be signed. It has to be a copy of a legitimate game.

There are ways to modify the console to run "homebrew" which could include modified game executables, but A) it's significantly more difficult and requires an unupdated system, and B) to my knowledge Microsoft would instantly know you were playing an unsigned executable and be able to ban based on that.

In any case, if the 600k number quoted in the article is anywhere near accurate, this is a brilliant business move on Microsoft's part. A very easy way to push up 360 sales numbers for Q3, since the pirates will probably just go out and buy another console.

Or people will switch to a different brand console because they are mad.

Or perhaps a new industry will spring up to re-chip the boxes.

In this case the legality of modded consoles to play backup isn't an issue because it sounds like Microsoft have something specific in the Xbox Live TOS to cover all modded consoles.

Pretty smart move really, something has to be done to get on top of this before there is no longer a video game industry.

For as long as I've been gaming there has been piracy. Throughout this the game industry not only survived but flourished.

I simply don't buy the reasons for this as being "to protect the game industry"... like music before it this is not what gets protected. What gets protected are the distribution methods and those go a way to protecting the artificial price... in other words, I believe that DRM only protects the profits of those who control the distribution.

In this case the legality of modded consoles to play backup isn't an issue because it sounds like Microsoft have something specific in the Xbox Live TOS to cover all modded consoles.

IANAL, but I believe that over here, that doesn't matter: if something is said to be legal by law, no company can forbid its customers to do so. Just like with renting an apartment: a landlord can demand all kinds of ridiculous things, but if there is a law that explicitly protects certain rights for homeowners, a landlord simply cannot take those from you.

It's the same with a TOS: a company simply cannot take certain rights away from you if a country's laws explicitly protect these rights.

I think that because it is the online service they have a much more solid footing - they can say under what circumstances you are allowed to connect to their network.

I cant comment on the specific Netherlands law but I am fairly certain most laws have solid provision for companies deciding what they consider right/wrong on their own networks.

If you want to consider another example what happens if a cheat hack appears that gives you a big advantage over other online players; would M$ be within their rights to ban you then? Is the only difference that gamers believe one to be morally wrong (cheating) and one to be floating somewhere in the middle (chipping)

If you want to consider another example what happens if a cheat hack appears that gives you a big advantage over other online players; would M$ be within their rights to ban you then? Is the only difference that gamers believe one to be morally wrong (cheating) and one to be floating somewhere in the middle (chipping)

I get your point, since one is a software mod and the other is a hardware mod. The difference is that our law says nothing about software modifications, while it does explicitly allow a consumer to mod consoles: you have the right to be able to make a backup disc of any game you purchase, and use those backup disks to play the games. You need to mod your console for that, and you can literally walk into any computer store and ask your X-Box to be modded.

But, I think you made a good point: the hardware in essense makes the software function differently, so if you would convert a certain software cheat to a hardware mod (if it were possible), you have a problem.

So I think the (legal) matter, in the end, is intent. This is why I think it's weird that Microsoft chose to ban all people that modded their console, instead of all the people that pirated games. One targets the fact that a hardware modification was made, the other targets the intent.

Well I guess the answer (and I dont necessarily support it) they'd give is that there is no real way to tell what the intent is and so better safe than sorry.

There is also an argument that chipping could introduce unknown bugs or weird factors that affect online games - or indeed other users. So a sort of unintentional hacking.

The ability to use Microsoft's servers for online gameplay is not a "right."

While there may be laws that give specific rights to tenants, there is no such law for game players.

At best, banned players could sue Microsoft for fraud, but I think they'd have a weak case and it would certainly not be "illegal."

Another interesting side effect of the ban is that it disables the ability to install and run games from the console's hard drive.

Is crippling the console's built-in functionality - which is unrelated to Xbox Live - a fair move? I would imagine the TOS to be irrelevant in that case, since it's not related to their online service.

actually there are two main types of modders: the ones that play backup copies (but buy original) and the ones that buy pirates, but pay for a Live account to pay online. Blocking both is automatically a loss for MS: it will take a lot of people away from the Live signature row AND it will be a great incentive for the backup-players to simply go looking for another platform (PS3, which finally reached a lower price?).

Yes, piracy is a problem to the industry - but simply banning everybody like that won't help solving it in any way (at least for MS)...

I wonder what how much noise would generated if Apple (or AT&T) did something similar to iPhones.
I'm amazed that in 2009 you can still find this line in a news article:

"Xbox Live allows gamers to play against one another"