Man, you couldn't be any more American if you tried.
Anyway, you're wrong to be upset by this, nothing is really changing from the sounds of it. You can mute and block players if you choose, but Microsoft does have a system in place where you can submit a complaint against another player if they breach the terms of service.
From the terms of service: "1.12. Are there things I can’t do on the Services? You must not use the Services to harm others or the Services. For example, you must not:
• use the Services to harm, threaten, or harass another person, organization, or Microsoft"
We're only now seeing stricter enforcement of a policy that has been in the Xbox Live terms of service-- it has existed and surely people put it to use, contrary to your claim that Microsoft let users police their own social experience. What we're seeing with Halo 4 is no different than the rules already set up-- presumably, people will file complaints against others that are accused of using hateful speech that is classified as harassment and those people will be banned, rather than given a warning or suspended as they may have been in the past (not sure what happened to those people in the past personally).
If one finds no harm in being harassed and in fact enjoys freedom so much that they take it with a smile, then they can choose not to report the player hurling freedom at them. But should they find themselves hurt, offended, or harassed by a player using racial, sexual, or otherwise disgusting epitaphs, then they may submit a complaint against said player. Which, in your words, still allows the users to police their own social experience.
I guess I'll take your first statement as a compliment. As someone who has been on Xbox Live since the beginning of the service, I know what the terms of service say, but it seems like they are just now starting to take interest in enforcing them. I have never seen or heard of anyone (just my personal experience) being banned for harassing someone on the service, and the only permanent bans I have witnessed were for cheating/modifications on Halo 2. So from my point of view, my statements are still correct whether or not MS meant it to be so. Anyways, I don't think anyone is genuinely upset over the news, personally I just thought it was interesting.
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