They'd only have to offer the source to those who asked for a copy. Even if they sent a CD or DVD with all the source on it with the box, the customers of this kind of service don't know how to run a compiler, so forget about them modifying it themselves. There's no root password requirement AFAIK.

Yes, it'd be easy for you, for me, or for thousands of others to take that source and make the box do something different. However, I'm certainly not willing to pay a yearly fee to have someone else admin my Linux box.

The only other place the source is an issue is if they're worried about competition in the same market segment. However, the hardware, marketing, and the remote admin team are what differentiates the service. They can give competitors the software source and all without changing their business model.

I have my doubts about the success of the business model, but the source shouldn't be an issue. Keep in mind they're not selling a product, but a service that happens to require some hardware and software. The service is the whole point.