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All sorts of examples of services only being offered to a specific group of people spring to mind. Eg, holiday companies which restrict holidays to people within a certain age range are perfectly legal, in spite of age discrimination laws.
It seems to me, that as long as Microsoft make it clear "up front" that if you modify your XBox, you will be excluded from the "Live" service, then anyone who chooses to do so is voluntarily removing themselves from the service, even though modding the hardware is an entirely legal activity.
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