Microsoft released a paper with information about the way that gamers will be ranked on the new Xbox Live:
The TrueSkill ranking system is a skill-based ranking system designed to overcome the limitations of existing ranking systems, and to ensure that interesting matches can be reliably arranged within a league. It uses a technique called Bayesian inference for ranking players. Rather than assuming a single fixed skill for each player, the system characterises its belief using a bell-curve belief distribution (also referred to as Gaussian) which is uniquely described by its mean [mju:] (“peak point”) and standard deviation [sigma] (“spread”).
Read the full release [here].