Isn't it obvious?
What they are talking about is a combination of:
1) Steam type pay and download - XBL already has this.
2) A memory transfer card type thing, the blank device will be signed by your XBL account by inserting it in your machine and "formatting it" (which will apply your PKI key to it) and then a retail outlet will copy your purchased game onto it. The device is then connected back to your xbox when you get home and uploaded/decrypted to your hard disk. Maybe the device can even be signed in shop by you logging into a terminal with your XBL account userid and pw?
#2 being the alternative for people with no decent internet connection.
There won't be packagin, boxes, expensive duplication distribution etc etc
Just like iTunes or Kindle... its really nothing new and not a great leap forward for MS.
The only question mark is how big the transfer device will be - its not going to be a "memory card" its going to be a SSD I'd have thought.
The issue will come when you are a non-internet user and you own 100 odd games - clearly the hard disk won't hold that many, so you need to swap them around, which means you always have to have the storage device - which probably means buying more than one.
The storage device won't be for 90% of the user base, just the non-wired.
Retail sales will bomb...
In answer to the question how do you give a game to someone for a present - you buy them MS points cards... just like now or with Itunes or Kindle...
For a tech savy crowd you really are a bit slow with this one.
PS the 2nd hand market will of course die, but you knew that was coming one way or another didn't you?