Every service I've worked on doesn't look, because they don't want to know -- there's no business reason to know. Having this kind of knowledge about customer content is completely counter to the business goals.

An intelligent company will work to minimize disruption to the user. Affording the user privacy and turning a blind eye to this sort of thing goes a long way towards producing a usable product.

But, what if someone complains? What if this photo was public and resulted in a complaint?

Even then, the idea that an entire account should be suspended over a TOS violation is absurd. By all means remove the content. Perhaps even disallow uploads for a time, or even indefinitely. But a policy of disabling everything including unrelated services and purchased content smacks if ignorant product design and typical Microsoft hubris.

This is a great example of why their product services can't gain traction in the market.

I have some "questionable content" in my Dropbox, and nothing has happened to me.

Sorry we have to check. Are you human?

Hopefully by only responding to warrants, instead of trying to play the part of the legal system.