My guess is that MS is going to take the businessman's guide to doing business, ie, figuring out which will be better for business -- letting people keep their modded Xboxes and possibly buy fewer new games since they can pirate them on their own, or trying to put in a new dashboard in a new game and having people with modded Xboxes not buy new games since they're afraid of screwing up their Xboxes.
Either way people are going to buy fewer new games, but if MS does nothing they're not going to incite the further wrath and fury of people who have modded their Xboxes, so that's my bet as to what they'll do.
However, if these people end up screwing up Xbox Live you can be pretty sure that MS is going to come down on them pretty hard.