CEO Steve Ballmer said Microsoft may pull its Xbox game console from the Australian market because of a court decision that legitimizes mod chips for hackers, an Australian newspaper reported.

Mod chips are gray-market add-ons that, once soldered to a console's main circuit board, defeat security systems and enable the machine to run legally and illegally copied discs, import games and homemade software.
According to a report in The Sydney Morning Herald, Ballmer said late last week that the company could remove the Xbox from the Australian market if Australia's legal system does not provide appropriate protections. Ballmer made the comments at an Australian event to promote a new PocketPC device, The Herald said.

Ballmer was commenting on a July ruling by a Federal Court of Australia judge who found that mod chips sold for Sony's PlayStation 2 game machine do not violate federal copyright rules outlawing devices primarily intended to bypass copyright-protection technology. The Australian rules are similar to the U.S. Digital Millennium Copyright Act.

Ballmer said the ruling threatens Microsoft's business strategy for the Xbox, which relies on licensing fees and other revenue from game sales to subsidize hardware manufacturing costs.

"Given the way the economic model works--and that is a subsidy followed, essentially, by fees for every piece of software sold--our license framework has to do that," Ballmer told the newspaper. "If there are aspects that are not allowed, it would encourage us to require a change in the legal framework. Otherwise, it wouldn't make economic sense."

Mod chips have been a headache for game hardware makers for years, but Microsoft has been particularly aggressive in fighting the hacker tools. The company changed the innards of the Xbox partly to deter hackers, sought to hire an Xbox hacking expert and may use the upcoming Xbox Live online service to detect mod chips. Microsoft also joined with Sony and Nintendo in a recent action against one of the largest retailers of mod chips for numerous game devices.