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There's a ton of new functionality in this update including Zune Music, ESPN, improved voice chat quality, enhanced Family Settings, and more. You can find a more complete listing of what's new on Major Nelson's blog.
As with any significant update like this one, some issues are bound to pop up and we're working hard to resolve them. In particular, we've seen two intermittent issues today:
Problems downloading the new update or new/updated applications like Zune or Netflix. There are a couple of different error messages that you might get here, and they all mean essentially the same thing - "Please Try Again".
Being asked to pay for content you want to download that you've previously paid for. If this happens to you, simply decline and repeat the download process. This problem is intermittent, and typically on another attempt LIVE should recognize that you already own the content and allow you to re-download it for free.
As we make progress against these issues I'll be back to update this post. Thanks for your patience.
EDIT: Yes, we aware of the Avatar Editor/Marketplace issue and are working on that as well.