Real money converted to Points that are used on Xbox live to buy Xbox live arcade games, rent movies, download extra content,buy tv shows...etc.
I just spent 800 MS Points on Castlevania:SOTN.
Tom used 300 MS point to buy his favorite episode of South Park.
the points you receive when you purchase items for your Xbox 360. They can be spent, like currency, in the xbox live marketplace, on movies, game demos, trailers, TV shows, and more.
"Dude, i got a new xbox 360 game today!"
"Sweet, what game?"
"Gears of War, and it came with 200 MS points!"