I've never had much of a problem with Microsoft's practices but it seems like they should be hire some more people. With the addition of Windows Phone 7 (damn you Verizon i want it) its just going to get worse.
I'm guessing your 360 is 3 years old so you can't ship it back to Microsoft for repair if that's the case i'd get a replacement Arcade model (i believe dell.com has some goods deal but a visit to cheapassgamer.com would find you the best deal). I replaced my 360 back in feb 09 and haven't had any problems. my first 360 red ringed 3 times.
Other than about 20 ps3 exclusive titles (at the most) I can't see why you wouldn't go with 360 if you have to make a choice.
I have both and gaming wise my 360 gets used 95% of the time and the other 5% goes toward the Wii/PS3. that being said i've watched well over 100 blurays on the ps3.
While i don't like the fact they are shutting down service (mainly because of steel battalion) it's understandable if the number of current users playing are that low. I just figured since it is all the same service that even with the low numbers that since they are still maintaining for the 18 million people (or however many people it is) on the 360 that it was just something that wasn't going to go away.
What i'm worried about is the future in like 5-10 years with the xbox 360. I'm assuming that this might make any orginal xbox live arcade games unplayable.
I'd really like to have more details as to why they are doing this.