I don't have anything against preventing piracy. The problem is, it prevents people for doing whatever they want with the hardware they have bought. It's like buying a computer and not being able to install another OS on it or whatever.
When they say "Microsoft has banned as many as a million players from Xbox Live for altering their consoles in order to play pirated versions of games.", I'm pretty sure they have no way of knowing if the individual altered his/her console in order to play pirated games or just to run alternate software.
It also appears that modification is prohibited by the TOU : "All consumers should know that piracy is illegal and modifying their Xbox 360 console violates the Xbox Live terms of use, will void their warranty and result in a ban from Xbox Live."
If people want to use MS's service, they have to respect it, whether they like it or not. Now I don't say that this TOU is a good thing, but people shouldn't have expected any other behavior from Microsoft. They have every right to do so as it is explicitly written. Now is it a good idea of doing so? Not my department, I don't know the numbers. But I doubt it.
Of course there's a problem of game piracy here, but people do not modify console necessarily to play pirated games. They can do it to run unofficial or alternative software on the computer. Because let's face it, a Xbox is basically a computer stuck in a beautiful casing. And a very restrictive TOU. If you want to do whatever you want with a machine, well the only choice you have is to buy yourself a "real" computer and stay away from gaming consoles. But from the looks of thing, we won't have the rights to do whatever we want on any hardware if this trend continues...