In another move to combat piracy, Microsoft had banned up to 1 million Xbox Live users. This had been done to users who have modified their Xbox consoles or have played games that were illegally downloaded/obtained.
Once your console is banned, you lose all online-related functionalities and applications. You will also not be able to play any game off the hard drive. But the hard drive itself is intact and it will still work if you plug it into another non-banned Xbox.
While there is nothing wrong in promoting legal use of copyrighted products, the approach does seem to be an issue. Consoles are often sold in emerging markets in Asia already modified. Not all consumers know about it and are just sold to by the sales people. Also, a banned Xbox can also still be resold as a 2nd hand unit so buyers beware.