Windows Live is on the ROM so it cannot be replaced, up/downgraded... unfortunatel we are stuck with the contacts being downloaded to the device - I hate this feature too.
I had the same issue with sync failing on my Sprint Mogul at the beginning. I gave up on the app... however, I tried it after upgrading to the new Sprint ROM and now it syncs. The only thing I did differently, I actually cancelled the initial sync and then sync'ed manually.
I have also experienced seeing all my contacts offline but still being able to chat. This happened the second time I used Windows Live Messenger. I believe this to be an issue on their end.
It has also been reported before that this app uses EVDO over Wi-fi. Don't have a 100% accurate answer... but I read that the app/device/OS will use the strongest available connection, however, I have also read of people proving that claim wrong.
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Samsung Epic 4G - LegendaryROM / Samurai kernel
ViewSonic gTablet - Flashback Honeycomb Alpha 10.1
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