Whether adolescent mischief or true delusion, a small percentage of user-generated content is always going to incite "discrimination, hate, or violence towards one person or a group." While Microsoft clearly defines the boundaries of condemnable content in its Online User Policy*, the company fails to suggest how it might protect its users from being victimized by such content. Probably because it can't.
With Sony on the verge of going all "Game 3.0," Microsoft may soon give up the lead in online console gaming (unless it adopts broader user-generated content support). But it's a delicate balancing act for sure. Unlike the sprawling, autonomous PC modding communities, Microsoft (or a competitor) will have to bear the heat of the spotlight when one of these offensive acts is eventually picked up by our sensationalist mass media and spirals into hysteria.
*While researching Microsoft's Online User Policy, we were particularly alarmed by the usage of the term "homosexual status" in place of the more common and balanced term "sexual orientation." The policy states that users may not "publish, distribute or disseminate any topic, name, material, file or information that incites discrimination, hate, or violence towards one person or a group because of their ... homosexual status." This statement assumes there's such a thing as "homosexual status" and implies that a gay person, who presumably is filed under this 'special' status, is free to deride a heterosexual player, but not vice versa. Sounds like reverse discrimination. So ... um ... time for a policy update, guys?