Both potatohead and I agree that GeoHot's exploit represented a potential piracy risk to Sony. The question I have is whether Sony could have done something other than disable OtherOS in response.
Well, they could have ignored it. The attack required a hardware mod and a little bit of luck to break out of the Hypervisor walled garden. But even after that was accomplished getting to piracy (either game or media) may not have been possible, at least in the short term. Unfortunately, history has shown that it is impossible to prevent piracy forever. The best alternative is to make it impractical enough for the vast majority of users.
It's also interesting to consider how Nintendo and Microsoft dealt with similar threats.
I'm familiar with how Nintendo tried to address similar attacks to the Wii. This is also well documented on WiiBrew and HackMii. Really there were two main exploits. The first was against the DVD drive electronics (mod chips), allowing "backups" to be used. This was made much easier because the DVD drive electronics were very similar to those used in the GameCube. Nintendo fixed this (as they should have in the first place) by redesigning the hardware to remove access to the signals used by the mod chips.
But the second exploit was much worse - a software only exploit which allowed unsigned code to be run on the Wii. This Nintendo "fixed" with several firmware updates. However, in each case the hackers have found new exploits.
Nintendo also charges a penalty fee for Wiis which have been sent in for repair with unauthorized software.
From what I have read, all Xbox 360 hacking required hardware modification and Microsoft was able to close the various exploits via a firmware update. Microsoft will also ban consoles for various reasons (including modified firmware), which prevents the console from being used with Xbox Live (online).
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