An abbreviation of a typo. Originally "Owned" which became "pwned" when some n00b with questionable typing skills wrote this linguistic abortion into their chat console. The term is an abbreviation of the newly-created word.

The term refers to figuratively getting your ass beat in by a forty-something year-old prison inmate, i.e. getting your shit kicked; getting your ass whooped; getting knocked out; you lose bitch.