Which are either gray market or flat out illegal anyway. I've been hearing that the banned 360s are being damaged more than simply not being able to connect to Xbox Live. If that's true there might be some possible argument that Microsoft overstepped its authority. But, again, that depends on whether or not the user owns the Xbox. If he does then while MS can prevent this person from using the Xbox to access an online service, the company cannot destroy this person's perfectly legal private property. That was part of the argument over Sony's rootkit scandal. There was harm being caused to people's private property beyond piracy prevention.
Is the modification itself illegal? Or, rather, should it be? That's at the heart of the current legal debate at the moment and we'll probably see more cases raising the issue. Let's assume MS went a step further and instead of banning the console they actually repossessed it because the licensee violated the license by modifying it. Would that be legal? Theoretically, under the same practice as I think is happening now it would be. But the legal battle there would be perfectly justified. It's still a controversial question. "How much of what I buy do I own?"