Appearing quite similar to the customizable Mii system used in the Nintendo Wii, "Avatars" are said to replace the Xbox 360's existing gamer pictures and are supposedly due out this holiday season. Below are some descriptions directly from Intellisponse:
"Avatars" are digital personals available this holiday for all Xbox LIVE connected members and this spring for all new console owners. "Avatars" will be used in place of the gamer picture you have today and give you a much more lifelike, animated and fully customizable persona for you to reflect who you are online.
With hundreds of clothing options to choose from your "Avatar" can truly reflect you each and every day!
Spend a few minutes or a few hours building and outfitting your "Avatar" to reflect the real you. The choice is yours.
Your "Avatar" will represent you as you jump into various arcade and retail games. You'll be playing in the games!
It is unclear as to what Microsoft may do with its existing gamer picture system, especially as many gamer pictures are sold for a fee in the Xbox Live Marketplace.