I'm not sure why it shouldn't be cloudflare job to make sure they don't host illegal content. If my super market keeps distributing illegal goods, even if they remove it after a court order, they will end up having to close the whole market.

Either they should police the content they serve themselves or they accept the right holders to do it (which sucks for everyone).

Also they certainly willing take all their customers as hostage, as they could certainly split their network into legitimate customers and shaddy ones so the blocking is not so impactful, but I guess they prefer to make it as impactful as possible to be able to complain.