I'm trying to wrap my head fundamentally around Source that comes with HL2 for free and middleware Source. Are there technical differences more than licensing terms?
The version included with our games (A.K.A. the MOD tools) includes a ton of tools and code for the creation of new products. However, there is a fair amount of code reserved for the "Pro" version.
It is certainly possible for end users or professional game designers (who are moonlighting) to create something with the tools included with purchase of our games, and then defer any decisions about licensing and sales until they've got something working. This was exactly the case with Counter-Strike, Day of Defeat, The Ship, and others.
Could a modder make something with the end-user Source and then, because of this announcement, would it be technically trivial to port it to the Xbox 360? (I'm overlooking licensing and publishing issues with this question.)
That's the idea. Obviously a MOD could have issues that need rethinking (like mouse-centric user interface not being as useful on the 360), but the same Source Engine features are available on the 360.
In general, what would it take for a company to port a published Source game to the Xbox 360? A recompile? A recompile plus minimal extra work? A lot of other work?
The game logic, audio, models, textures, most shaders, and the game levels are generally ported with minimal work -- usually just a recompile. The remaining work depends on the title: Does the UI work with a gamepad? Do the networking features need to be reworked for Xbox Live? Does the game require more than the Xbox 360's 512MB of RAM?
Is networking a part of Source, or is it strictly a graphics engine? Would a PC Source game and an Xbox 360 Source game inherently be able to network?
Source is a complete game engine. Source supports multiplayer game development on PC and Xbox 360. Source is capable of communicating between Xbox 360 and PC versions, but Microsoft currently places access limits on the Xbox Live service that keeps developers from making products that connect users of both platforms.