Well, so much for low-hanging fruit! I wonder if it could be some type of timeout issue. Can you create a duplicate dataset, delete half of its features, and then try the process again? Maybe it is the process' duration which causes the problem.
Also, we experienced Network I/O errors for months. Our issue was resolved by removing all service connections with direct connections. My suspicion for the root cause is our own SDE/desktop version differential. I would ensure the presence of only direct connections in the mxd which creates the xml.