If you mean "justified" as in "is Microsoft allowed to do this," the answer is most likely yes. I'm not an Xbox Live user, so I don't know exactly what's in their entire EULA or privacy policy. But those things that most people (yes, myself included) click through contain a lot of contractual stuff, and the ability for the provider to basically ban you at will is often among them. The excerpt that the article quotes certainly does suggest this.

As for whether it's the right thing to do, it's certainly a bad idea from a PR perspective. Just the fact that there are so many articles, of varying degrees of outrage, is proof. It just looks bad to ban a lot of people, especially when there isn't a clear-cut, case-closed, obvious-to-most-people reason. And it's also probably a bad idea from a sales perspective -- how much revenue could these millions of people have brought in? Compared to the trickle of people who might start spending a little bit more because of their decision? Overall, it looks like Microsoft is trying to take the moral high ground in a very forced way, and I think it's going to backfire. It's already started.

Well all of the people involved agreed to it when they signed up for xbox live... they may not have realised it but then thats their fault for not reading the smallprint. So if Microsoft wants to do it then they can..

The other question is "is it a good idea for Microsoft to do this"? and I'd have to say the answer is NO. they're going to get a lot of bad press about this, and any 'undecided' buyers in the market now will be busy looking at Nintendo and Sony who don't have a lot of people moaning about how unfair they are now.