Wording in the literature sent out with the first batch of Xbox Live kits appears to indicate that Microsoft will use the service to hunt down consoles fitted with region and piracy protection by-passing devices.
The 14-page user agreement bundled with the beta-testing kits contains the following clause. "Xbox Live may only be accessed with an unmodified, except for Microsoft authorised repairs and upgrades, Xbox video game console. Any attempt to disassemble, decompile, create derivative works of, reverse engineer, modify, further sublicense, distribute or use for other purposes either the hardware or software of this system is strictly prohibited. Microsoft may retrieve information from the Xbox used to log on to Xbox Live as necessary to operate and protect the security of Xbox Live, and to enforce this Agreement."
Reading between the lines of the first and last sentences of this quote, it appears that Microsoft will gather information from Xboxes trying to access the Xbox Live service and stop them from accessing if they are modified in any way.
Although this news backtracks upon previous MS statements, the wider gaming fraternity will surely welcome it. Allowing hacked machines onto the network could result in possible security issues, as well as the sort of in-game cheating that has plagued online titles such as Counter Strike. It's also worth mentioning that Microsoft and other publishers deserve to see money from legitimate game sales and subscribers to the online service.
Although the user agreement may hamper "legitimate" hacking of the Xbox, such as the attempts to see Linux running on the MS console, surely Microsoft has no real option as it sees no benefit from tampering of any kind with the Xbox.
Expect to see more as it breaks.