This also boils down to a number of other arguments: independent developers having a chance to break into the industry without having to sign to absurdly high-priced development kit contracts, playing import games and backups of games you have that are either in really bad shape or destroyed (I bought the NiGHTs PS2 remake and it's Japan-only, and I have a PS3 without PS2 support, so I had to get a flip-top case for my PS2 to allow NiGHTs to even work. I don't see why I'd have to invest in a whole other system to play a single game! and my original PS1 copy of ehrgeiz is in terrible shape, so I made a backup of it ages ago and use that instead of causing further wear and tear on a disc that is extremely hard to find these days and possibly doesn't even work anymore) and full hardware utilization.
The online functionality of systems these days deters and prevents hacking, cheating, and piracy in a number of ways, and advanced copy protection (note how the PS3 has not yet truly been mod-broken) prevent many attempts of illegal piracy. However, there is a line that needs to be drawn between detering illegal action and crippling a system's hardware and software potentials. I'm in agreement with Rama in that "I buy it, I own it, I should have the freedom to do what I want with it" with the caveat that it does not interfere with other people's enjoyment of anything. I log onto xboxlive with a trainer giving me infinite lives and noclip, that's messing with people's enjoyment. I log on either running a backup of a game that I own already, or have unlicensed media code so that I can have subtitles in foreign AVI's running a codec that xbox didn't initially support, that should be within allowable limits.
The guy that's going to jail was also probably selling pirated software on the side, or providing means to access it for the people he modded consoles for (just an assumption, but it's within reason). Simply modding a console should not merit that punishment though.