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Yeah, they definitely need to work out some kinks--but I fully support banning modded consoles from X-box live.
It's away to punish pirates, as well as deal with people who modded consoles to allow cheating in online games--which is an issue as well.
They just need to find away that doesn't cast the net too wide and catch people not doing those kind of mods. Other mods are punished enough by voiding the warranty. Just the mods of pirating and cheating need extra punishment IMO.
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