If someone with a modded drive had their live account banned, sure that would piss them off, but creating a new account is far cheaper and easier to do than buy a new 360!
Also, "ban the IP"?? howabout the person who's IP is banned just sets up a dynamic IP and resets their router... sorted.
So basically, banning the box is M$ best way (short of getting the banned box's MAC address and giving them to the police) of tackling piracy.
Im not condoning what M$ has done, and iv not got a banned 360, just pointing out that moaning bout being banned and asking the powers that be "why my box, and not my account?!" is redundant because these people clearly do have an idea of how to tackle piracy (they built the thing thats being pirated!), which is what they have done.
Also, i just wanna add that i do believe there may be a way of how to counter this in the future, just not yet.
The most effective way of countering the piracy from M$ point of view is to ban the box, not the account.