I'm not necessarily blaming Lionhead for this issue. Creating on online game via Xbox Live puts them at the mercy of MS development/infrastructure, particularly if they were adding "new" online features not in any existing Xbox Live game. Integration testing without being able to test in production can be a bear.

In any event it appears that the patch will be released day one, so this is just a tempest in a teapot.

It is a day 1 fix.

I assume that you can't install a game update on a 256MB Memory card.

Can you get a gold membership without a hard drive?

I don't know.  If you can't that really makes the arcade sku useless.

Fable 2 online co-op does not interest me in the slightest so this is no big problem for me. I do not want someone entering my game and stuffing up my world.
The Fable 2 game single player game looks interesting and a vast improvement upon Fable 1.

There is a setting in the game that will disallow changes made by online players to take effect.

I can settle for Co op split screen and single player for a while

 so was the LBP one :p

They said they are working hard on it but they didn't give a release day hence it may not be day 1.