It seems that around 600 thousand owners of Xbox 360 lost their right to use Xbox Live service. The reason being is the illegal modification of the console allowing users to play pirated versions of the game. Microsofts indicates that any changes to the console's hardware or software is considered illegal and breaks the Xbox 360 agreement in result disconnecting users from the service.
The business sector in video gaming industry depends on the purchase of the games and/or services. The incomes come from second or third parties allowing gaming companies to develop more games by paying their employees. If the company lacks the necessary budget to make the game then the next "big hit" is going to be your windows calculator.
Microsoft provides no information regarding how they identify modified consoles but they are sure all of them are now officially banned from Xbox Live service.
Being banned from the service does not stop the console from operating but simply now allows to use the Xbox Live service ever again. Microsoft loses around $1 billion because of hacking and cracking actions on the hardware and software.