Well, one thing to consider is that XBox is a viable stand alone game system. I believe the reason MS kicks people off XBox live for modding is that modding can often result in cheating, and condoning cheating in a online game is a quick way to lose your client base.
On the other side, in the U.S. modding your XBox is illegal under the DMCA anti-circumvention rules. Cell phones were specifically exempted from this provision.
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