Update 3: An online fact sheet [.doc link] from Microsoft reveals that the Game Room itself will be free, while games will range in price from 400 ($5) for a dual-license purchase of arcade classics, 240 ($3) for a single-platform license or 40 ($0.50) for "two quarters" worth of play. Users can try arcade titles for free within a friend's room. For full details, check out our follow-up post.
Update 2: According to Major Nelson, Game Room users will have the ability to purchase games for their virtual arcade and play them on both their Xbox 360 and Windows PC. Additionally, new Game Room titles will be made available every week. Users will be able to invite Xbox Live friends into their respective (and customizable) rooms to show off their arcade collection. Stock up on Microsoft Points, kids.
Update 1: During its CES 2010 keynote, Microsoft's Robbie Bach announced 30 arcade titles will be available in the Xbox Game Room when the service launches this spring for the Xbox 360 and Games for Windows Live.
Original: Hours following a leaked interview featuring Robbie Bach, Microsoft has confirmed the existence of a virtual arcade room for Xbox Avatars via this trailer unveiled at CES 2010. The Xbox Game Room is slated to hit the Xbox 360 and Games for Windows Live this spring, allowing players to visit a virtual room filled with classic arcade titles. According to the video, users will be able to customize their arcade rooms (presumably for Microsoft funny money) and challenge friends to a plethora of original arcade versions of games such as Centipede, Outlaw, and Star Raiders.
The news that Game Room will also launch for Games For Windows Live raises the question, will the service see Avatars added in the near future? As the upcoming arcade is centered around entertainment for your virtual identity, we'd hope the service would see an interface upgrade bringing it closer to the Xbox's current NXE, rather than locking our poor Avatars up inside of an executable program.