Navagon: That sums it up for the most part, yes. But it doesn't explain why all these hacked Xboxes were overlooked for so long. You can't tell me that only now have they figured out how to sort the pirates from the people who actually buy their games.
I reckon they thought they were making more money from the pirates than they were losing and either changed their minds or got a nudge from a major publisher or two to actually deal with the problem. The latter looks likely given the timing.
Bad PR, plain and simple. This is going to hurt MS's credibility as people scream that they weren't aware that modchips were bad or that they bought the XBOX second hand. Even though MS did nothing wrong, it is not going to end well.
Unfortunately, this time, the game got leaked a few days beforehand and the release event was too big. I am sure there were people on the forums and chats wondering why their friends or other people already had MW2 achievements and the like. So you can't really look the other way then, and it makes it MUCH more apparent who is actually pirating stuff.
Delixe: Indeed its the hypocracy that annoys me. It's bloody obvious that MS has been turning a blind eye to this and pointing the finger at the PC for years if it is indeed the case of just pressing a button which it seems to be.
Also PC piracy is extremely easy to catch as long as they try playing their games online which is what any pirate is able to do with Xbox Live. You may say that 1 Million users is a drop in the ocean but how many pirates have 2 Xbox 360's one for playing pirates and one for playing on Live? I would imagine the number of pirates is Far higher on Xbox than the figure we see here and they are just as hard to catch as the PC pirates.
When has MS been accusing PC gamers of piracy? If anything, MS has been fighting for us to remain a platform (on the condition that MS profits from it :p).
Again, I doubt they just now figured it out. But again, PR is a big issue.
And honestly, if a gamer has purchased two XBOX 360s and plays legal games on one and illegal games on the other, where is the problem? If I were whoever MS has in charge of this department, I would give those guys a gift. They bought the console twice, and legally own games to play online.
And catching PC piracy online is actually very difficult without central authentication servers (which make everyone angry). Yeah, your key is not unique. But most dedicated servers don't phone home (and don't ask for the key, since that would make piracy even easier). Plus, take a look at Modern Warfare 1. That has a central authentication server, and if you get disconnected from a game, you can't connect for a few minutes while your key times out. If they counted that as piracy (and it is the only easy way to detect piracy), then everyone would be banned.