The DRM tool allows you to transfer licenses from one console to another. For instance, if you bought a console a year ago and downloaded a bunch of content but then bought a new console this year and downloaded more content, you couldn't play all of the content on both 360s without being signed into LIVE. With this tool, you can consolidate all of the downloaded content licenses to your preferred console. This way, you don't have to be signed into LIVE to play.
The process takes less than a minute. There is no content being transferred, only licenses.
This process will work on any console so if you had to trade an Xbox 360 at a local retailer, you can still use the tool to migrate your information. However, you can only do this once every year (365 Days). If you send the console to Microsoft to be repaired, they will automatically update all of your licenses. For more information on console repair, visit: http://www.xbox.com/support.
If you bought a larger hard drive and are re-downloading your licensed content for the same console, then you should not need the DRM tool. However, if you used the Migration cable to transfer your content from an older console to a newer one, you will need to use the tool to update the licenses. Again, you can only do this once a year.
You will still be able to play all of the games you own on all of your consoles as long as you're signed-in to LIVE. The console you transferred your licenses to will be the one that you can use without having to be signed-in.
The tool will work with all content except movies. Movies are not "download-to-own" so the licenses are not transferrable.