Microsoft says it is cutting off gamers who have modified their Xbox 360 consoles by adding extra chips or hard drives from its Xbox Live online services. The company says that "a small percentage" are affected – possibly as many as 600,000 of the 20 million Xbox Live players, but perhaps up to 1 million around the world.

The banning is part of a sweep that Microsoft carries out each November to remove modified Xboxes from its online gaming service. "Modding" or "chipping" is popular among people who want to play pirated games, but also games bought in other regions, or their own homemade ones which build on the original. It usually requires physically soldering new components into the device.

In some cases, modding allows players to cheat within online games - as happened with Microsoft's hugely popular Halo 2, where modded consoles had a better chance of winning. Beginning in 2002, Microsoft released an online update to its service to remove anyone with a modded Xbox console. Since then there seems to have been an annual check of machines to see whether they have been modded. Any machine that has been detected as being modded is added to a list, and cannot rejoin the network in the future.

However, being banned does not stop the console itself from working; it only stops the player using the Xbox Live online services.

There are scores of websites devoted to modding games consoles. In some cases the modifications allow players to create new "maps" for existing games or to install larger hard drives, for saving games, rather than buying them from Microsoft.

Microsoft has not said how it identifies modded machines. Some gamers claim to be able to "turn off" their modchips and evade detection – although having a non-Xbox hard drive is apparently detected and leads to a ban.

Microsoft said in a statement: "All consumers should know that piracy is illegal and that modifying their Xbox 360 console to play pirated discs violates the Xbox Live terms of use, will void their warranty and result in a ban from Xbox Live."

Almost all forms of modding of consoles are illegal in the US and Europe – although that has not prevented them becoming big business, with online companies promising "simple" and "solderless" installations. Earlier this week the Court of Appeal dismissed an appeal against the conviction of Christopher Gilham, who had been convicted in September 2008 of selling "modchips" – used to modify consoles. The court found that playing a counterfeit game on a modded console infringes the rights associated with the game. The Entertainment and Leisure Software Publishers' Association, ELSPA, which represents the video games industry, says that criminal games copying and other illegal activities cost the industry more than £750m annually.