The hackers who coded the exploit and known collectively as Free-X only wanted one thing--for Linux to run on the Xbox.
They had found a way to make it workable, but realised the technique they had developed could also be used to pirate games, something they were keen to avoid.
So, they set about contacting Microsoft to discuss ways to work together to get Linux to run on the machine without threatening the intellectual property of Microsoft games developers. And that's when the wheels well and truly fell off.
It is still unclear if Microsoft's decision not to engage Free-X in a dialogue of any kind was deliberate. Had it refused to negotiate with Free-X because they were trying to bend Microsoft over the proverbial barrel? Or was it because the software giant didn't understand the seriousness of the situation? Or was it a simple case of non-existent clear lines of communication within Microsoft when it came to this type of issue?
It could have been because the company realised that no matter what it did, it would lose.
If Microsoft negotiated with Free-X and put out a signed Linux boot loader, which would let Xboxers run Linux without allowing piracy, it would be seen as an endorsement of the open source operating system. It would also mean that people buying the Xbox console, which is subsidised by Microsoft, could use it more or less out of the box as a PC. It would also mean putting Linux in front of a whole bunch of people who would otherwise never use it.
On the other hand, if it did nothing, the exploit would be released, piracy would become a walk in the park and games developers would lose out. So Microsoft could choose to give Linux a boost to the detriment of its core products, or see an increase in games piracy that will most likely affect sales.
Ignoring intent and focusing on effect, the end result of Microsoft's refusal to negotiate has been disastrous. Free-X released the exploit whilst making a whopping stink about how little Microsoft appeared to support the intellectual property of its game developers. Microsoft lost on both fronts--Linux will run on the Xbox, and piracy will increase.
Using the media to threaten Free-X with legal action--most likely under awful laws such as the Digital Millennium Copyright Act (DMCA)--probably didn't help Microsoft's cause on the security front either. Hackers, who had been reluctant to work with the vendor on security issues, will be even more afraid of legal action now, even though Microsoft has come forward in leaps and bounds in terms of addressing security issues in most of its non-Xbox products.
Unfortunately for Microsoft, the well-established image of an unresponsive behemoth that seeks to crush defenceless individuals who dares challenge its monopolistic position through innovation has been reinforced...perhaps unnecessarily.
However, Microsoft has drawn a significant amount of support through the saga. Feedback has suggested that many found Free-X's approach to be one of blackmail. But the question then has to be asked--what alternative did Free-X have? It could be said they were caught between a rock and a hard place themselves if they wanted to do anything except ditch their research and never ever talk about it.
Now, we must wait to see what will happen next. It could be a few months of legal wrangling, of increased piracy, and possibly a rapid decline in backyard mod-chipping businesses. Or maybe, nothing will change after all.
you say:
It would also mean putting Linux in front of a whole bunch of people who would otherwise never use it
Modding and so on is only done by a VERY small % of people who buy an Xbox. Your assumption that people WANT to run Linux, or anything else for that matter, on Xbox is flawed
People buy an xbox because they want a games console. A box to play games on that doesn't require a degree to get it to work... you turn it on and play games. It's really as simple as that.
You are NOT introducing a new market to Linux if it runs on an Xbox. People MAY by an Xbox because you can get Linux runs on it, but these people use linux anyway.