That also generated a couple parse errors in my brain until I think I figured it out.
I'm guessing what they mean is the user must be logged into Live in order to play the game (requiring the Xbox to be online), however the game itself cannot access the Internet in any way.
For the xbox indie games, you can't use sockets or any network access outside of what they provide for the xna api on the xbox. This limits the games to peer-to-peer with a max of 6 (maybe 4, can't remember offhand) players in a single session.
In general, the indie dev situation is awesome on xbox, especially compared to ps3 or the Wii. It has a great community set up for controlling quality and content ratings without requiring intervention from Microsoft and the speed you can go from no tools to code run on the 360 is nothing short of amazing.
That was something that confused me about the article. "Euthanizes" implies that Microsoft is actively trying to kill the service, but from the complaints it sounds like they are simply failing to improve it. And if they are already better than their competitors, it's not surprising that there is little pressure to improve.
Given that, it seems unreasonable to assume that the situation will not be better for Windows Phone, since Microsoft will need to stand up to comparisons against the iPhone and Android development experiences.
They're actively making changes to the service that make it worse, so it goes a little further than 'failing to improve'. The platform was already in need of significant improvement to serve as a real revenue stream for indie developers - only the biggest successes on XBLIG were bringing in revenue streams large enough to justify further development as anything other than a hobby. The changes they've made have actively made this situation worse, by making it harder for end-users to discover/purchase games and harder for developers to support their customers. Their current trajectory indicates that their only concern is the success of Windows Phone 7, and based on how they dropped support for Zune, if WP7 fails they will probably kill the Indie Games program entirely and use the funding on something else.
What particular changes have they made that make it worse? Looking at the article, and from all the newsgroups/mailfeeds I'm on, the only changes are the 4.0 breaking updates (expected with a major point change, same thing happened going to 3) and the menu layout. Everything listed in the original article here have been in that state for the past few years.
...
XBLIG can not be played offline"
Well... damn.