If you buy a piece of content, such as an Arcade game, off of the Xbox Live Marketplace, it is tied to two pieces of information: the gamertag that made the purchase, and the console on which that purchase was initially downloaded. Those two bits of information are encoded in a "license". That license is generated and stored on Microsoft's servers, and a copy is stored with the content (possibly encoded within the file itself, maybe in a separate file; its exact location isn't important).
When you go to access this piece of content (i.e. play the game, or select the downloaded map from the in-game menu, or watch the video, or whatever the "content" is), the console reads the license and checks to see if either of two conditions are true:
- 1) Is the gamertag in the license currently signed in and connected to Xbox Live?
- 2) Is this console the same console as the one in the license?
(note that a valid, active connection to Xbox Live is required to validate condition 1)
If you have, or have ever had, more than one console (either you own more than one, or you've replaced it via a store warranty instead of a Microsoft repair), you may have purchased content on multiple consoles, and so you have licenses that have different consoles stored in them. If you are the only game player in your household, this might not be a problem, as no matter where you are, you will always validate against condition 1 and be able to play your content (as long as your internet connection is active and Xbox Live isn't down).
However, if your internet connection goes down, or you have other family members in your household, you may find that some of your legally purchased content doesn't work right — either it's unavailable, or it only lets you play in "trial" mode. This is because condition 1 can't pass (either you aren't logged in when your family/housemates are, or you are unable to log in), nor can condition 2 (it was initially downloaded to some other console).
To mitigate this, Microsoft created the "License Transfer Tool", which lets you transfer all your licenses' console registrations to the same console. Using the tool, you can move everything to your new/current console, updating the console ID stored in the licenses on Microsoft's servers. To update the copy of the license on your actual console, you have to re-download each piece of content individually — however, when you select to re-download a piece of content you already have, your console just updates its copy of the license, which is a very quick download. It's still tedious if you have a lot of content to re-download, since you have to do it one at a time, but at least each download itself is typically less than 15 seconds.
Finding all your content used to be a royal pain in the neck. You could go into your Xbox dashboard and page through your download history, but, since everything (every preview video, every game demo, every seemingly inconsequential bit) is stored there, it was tedious to page through and find it all and download it all one-by-one from the console.
Now, the last page of the transfer tool on the web has a link to your download history, and you can add items to your queue straight from there. Each piece of content is labeled with what it is (demo, video, arcade game, add-on pack), making it much easier to tell at a glance whether it's something that needs to be queued, and an "add to queue" button is right there on the list. The queue is still limited (to a couple dozen items), but if your Xbox is on and signed in while you do this, it will be downloading the licenses faster than you can fill the queue.
Note that Microsoft insists this is not for everyday use, for moving content back and forth between consoles at-will. To enforce this, they only allow the tool to be used once every 12 months.
I had been resisting doing all of this for a while, but my kids were bumping up against some arcade games that were showing up as trials again recently, and I decided to bite the bullet and do it (again; I had done it once before, the harder way, well over a year ago), and I marveled at the improvements in the process. Now they can play all the games I've downloaded.
Sounds nice and easy, right?
Well, it occurs to me that, with every Xbox I've gone through (I think I'm on #5 now), and with some licenses that have transferred and some that haven't, whether I've used this tool or not, the vast majority of my games have not had any issues whatsoever going from Xbox to Xbox.
Why? Because they're on disc.
While they did make the license transfer tool much easier, it's still many, many, many times harder than it should be. Why can't you move your Xbox Live Arcade game to another console and let another gamertag play it? For that matter, why can't you take a game to a console that's not connected to the internet? There's nothing stopping you from doing that with a disc.
Maybe they did make a bad situation better, but it's still a very bad situation.