Jeff H, unfortunately, I've said all I can say on the matter regarding Microsoft's policy; I can however expand on OURS.
Online service providers will continue to grow more restrictive in allowed content, because the US federal government has made their intentions well known that they (the government) holds the service providers accountable. The federal government has moved beyond takedown notices and cease & desist letters and moved directly in to seizing equipment.
Often, the idiots take TOO MUCH, too.
There was a datacenter in Texas that offered co-location services for customers. As with many datacenters around the world, they provide the connection and the facilities, and rent out rack space to customers. (Datacenter racks, by the way, represent some of the highest real estate per square foot prices in the world; it's my company's #2 expenditure behind payroll).
Anyhoo, the FBI came in to that datacenter and took ALL of the equipment out, because they traced illegal activity back to one customer in the datacenter. They didn't bother asking the datacenter operators which equipment belonged to who; they shut down the whole damn thing and loaded ALL of the servers, routers, and communications gear in the building up and hauled it off. Took down MANY legitimate companies and it was quite some time before they got it all sorted out. A lot of equipment was returned damaged or inoperable.
So, yeah, hosting providers (like my company) are VERY SERIOUS about covering our asses legally. If we even suspect a client is doing something illegal, we have to act promptly and cooperatively with law enforcement, or run the risk of ALL of our servers getting seized.
It's even more confusing for them now - because multiple customers are hosted on private clouds. Multi-tenancy - many customer servers running on the SAME physical equipment, and cloud technology - ability to move customer virtual servers from one physical server while they are running, to another physical server or cluster, without disrupting the services provided, are increasingly common.
So you can't even draw a line anymore of "this customer is running on THAT server, or THOSE servers" - those servers might be running hundreds of virtual servers for dozens or hundreds of customers.
As an example, right now our standard rack design at my company is an 8 node highly available failover cluster with 128 physical Xeon CPU's, 768 gigabytes of RAM, four redundant switches, four redundant storage servers with 48 drive/48TB of RAID6 storage space for customer VM's. We can run up to 448 customer virtual servers per rack off that cluster, each (theoretically) belonging to a different customer, while retaining the ability to lose any one of the host servers without incurring downtime.
So in that one rack, we could have as many as 448 different customers.
If any of them do something illegal, we have to act, to protect the other 447 customers on that equipment.
We use the same exact technology as Microsoft does in THEIR cloud operations, so I have to assume they are in a similar situation.
Does it make more sense now?