One simple reason, single player.

This isn't true in most cases, the algorithim is known as it is present in the memory of the cracker's computer. A debugger (typically OllyDbg or Immunity Debugger) will be used and the algorithim identified and replicated in the form of a keygen.

The dongle method moves that algorithim to an external component, if that component is simply returning a serial or some such it is easy enough to patch. However if critical functionality exists on the dongle, then the cracker would have to emulate this or otherwise fill in the missing functionality in the compiled binary. This is no small task (but has been done before).

So a dongle that contains core functionality and only accepts signed code and has an encrypted update mechanism will be quite robust in terms of protection offered. However when you have a 10k price on your product, it opens the door for commercial piracy ventures to move in, these guys have no problem cloning hardware and will be selling your software for 5k a peice instead of 10.

So yeah, dongles can work well at stopping non-commercial piracy.

The Xbox won't run unsigned code, Microsoft have to sign the executable with their private key.

So if MS don't give it the go ahead, it wont run.

So you can develop and distribute it all you want, but without MS love it wont actually be usable on the Xbox platform.

As a researcher at a university I can safely say that 1 through 3 don't happen anymore. As for 4 & 5, managing those students is harder than doing the work yourself. We have to give those students the opportunity however (even though we almost always end up re-doing the work ourselves).