What are they?
Microsoft Points were introduced with the launch of the Xbox 360 in November of 2005. Each game, theme, set of gamerpictures or piece of DLC on the newly unveiled Xbox Live Marketplace cost a certain amount of Microsoft Points (MSP).
How do they work?
Each gamertag has their own personal "bank" of points that can be increased by purchasing more MSP from the Xbox Live Marketplace or purchasing cards from retailers that can be redeemed to a user's account. Consumers were unable to purchase the precise amount of points they desired due to the fact that the point totals available for purchase were incremented pretty inconvienetly. Thus, if you wanted to a purchase a game that cost 800 MSP, you could not buy the 800 MSP you wanted. You would have had to buy the 1000 MSP denomination from the Xbox Live Marketplace. This led to a lot of left over MSP from purchases that would not quite add up to a new purchase, forcing the consumer to purchase a new bounty.
Ingenious marketing? Or douche bag move?
At present, US$1 will purchase 80 Microsoft Points. Different currencies have different exchange rates, and Microsoft Points tend to be region-locked.