Stemming from the misspelling of the word "owns", being that the "p" key is right next to the "o" key. It does not mean the possesive "owns", but as in a form of domination, such as in a game or sport.
Dude, he pwns you at Halo.
He pwns all of you at basketball.
I pwn your sister... all night long.
It originated fromthe word "own" but since the P is right next to the O people confuse them. People in internet games would say "I'm gonna own you!" which would mean "I'm gonna beat you at this." or something to theat extent.
Pwns is a "l33t" word used for "Owns" which is used to mean someone is better than someone else, I. E. "He Owns(Pws) You." It's a stupid an annoying term that fits into the whole "1337" category used by stupid gamers who think they're cool.
Essentially it means "is much better than" or "humiliates", and is most commonly used as a verb. "Pwn5" is the ultimate way to say "pwns", much in the same way "1337" is the ultimate way to say "l33t".
The "5" represents the "s". It is also mid-way between 0 and 10, so is considered a direct hit between the eyes i.e. perfect. This stems from the origins of the word in online multiplayer gaming, where a perfect shot is respected.
So if you want to be 1337, you should say "pwn5" instead of "pwns" ;) :P