You're largely on the ball there, but in truth, it's a HORRIBLE way of tackling piracy, because it contradicts the very rules of capitalism. If you want someone to buy a game rather than pirate it, you have to offer a better deal. In this case, they're offering a gimped game that is prone to downtime frequently and other frustrations, versus a game that is otherwise identical, but runs flawlessly. Now, if the former was free, and the latter $50US, you could bet that plenty would pay for the latter. But if the prices were reversed? It hence becomes a no-brainer that piracy is so frequent; many go not simply because they don't have to pay, but because it's a better product. Capitalism doesn't work in a perversely different way just because some publisher/label wishes it.
Yes, you're saying you have little to no clue how the sales model for games works. You see a $50US price sticker on AC2 at GameStop, and you think that Ubisoft gets every dime? Rather, they get a small fraction of that; there's a bunch of people between the developer and the gamer, and each wants to take their own cut. First off, GameStop (or Wal-Mart, or whoever sells it) wants their profit too; it's how they stay open. Then there's the cost of distributing all those copies; trucking them thousands of miles, from the publisher's warehouse, to the seller's warehouse, and finally to their store. Then there's the cost of stamping each disc, printing the box, manual, inserts, etc. and packing them all in. None of this is profit for Ubi; in the end, they get maybe a few dollars out of each sale.
At that point, you have to wonder if $1-2US million in "lost sales" is worth the effort of trying to recover. It's much the same as with the government, where some taxes and fines cost more to collect than they bring in. Again, capitalism at work. With "luxury goods" (i.e, those non-essential to living) you can't circumvent the rules of capitalism no matter how hard you try.