That is not "even worse", that is relatively insignificant. An IM client converting text to smilies by default is standard and easily disabled, or avoided by a different using client.
On the other hand, the issue above represents a horrible failing on the part of MSN as a network/protocol. Silently dropping messages without giving error to either party is insanely stupid behaviour, and MSN's done it frequently for as long as I can remember.
Actually, any mangling of the text is bad. It is bad to drop text, and it is bad to change a line of code to have cartoon graphic images randomly scattered (which you, the sender, don't see but only the receiver does), which makes you look stupid in the eyes of the person receiving it. At least dropping a message makes it look like a network error, the other can make the message sender look like an ignorant fool. (I'm very sensitive to having what I write get changed by something, which is why I absolutely hate auto-correct in a word processor). Both cases have the effect that our corporate-mandated IM client is utterly useless for IT work where you have to send commands or code snippets to others on the team.
No, MSN Messenger did change it for the sender, too. The receiver of a message's settings determined whether they saw the image. You could turn it off in the Text Formatting options, just a simple checkbox.
So I'd disagree with the 'utterly useless' aspect.
That's exactly what I said, if you, the sender, have smilies turned off, you will see the normal code (...:) for example. But if receiver (the person you are sending the message to) doesn't know to turn smilies off, they will receive a graphical picture where the ":)" is in your message, even if it is part of a code block. And there are so many smilies that I don't recognize (not just the ":)" ones), that I never know what the receiver is going to see. Hence, it is useless for sending code fragments (or anything else other than conversational text), since you never know if what is on your screen matches what the receiver will see.