He's talking about XBox Online Gold Pass... a subscription service which allows you to play games online vs. other players connected to the Xbox servers via your home internet connection. It also allows you to access online content such as news, movies (Netflix and Hulu for example) and yes, ESPN3. In order to access ESPN3.com you must be a Verizon customer I believe, although somebody was telling me recently that's no longer the case. The way it works is that the XBox 360 console essentially functions in much the same way as does your cable box, a receiver to decode the satellite transmission.
I mainly use XBox Live to play against other players, to watch the occasional Netflix movie, or to watch sports. I recently watched a college basketball game I'd missed earlier that day... but it's valuable for games that you normally won't get on TV. Personally, watching online (on my laptop) was a better experience because I have an HD TV and HD service and the low resolution of the XBox stream was kinda irritating... although I got used to it. Seems to me the stream was better on the laptop.