There's better power efficiency and it's cheap to produce too. It uses IBM/GlobalFoundries 45nm process and the first of its kind. It's fully compatible.
The motherboard is said to be smaller as less space is required and the power supply shrinks some too. The new 'system-on-chip' combines the CPU and GPU which process the commands for the system and the graphics of the console.
Memory and I/O logic are combined as well. Microsoft assures there are no compatibility issues between old and new designs for the Xbox 360 console and in fact the new chipset enforces a latency to mimic the behaviour of the older designs.
The SoC (system-on-chip) took 5 years to develop and has about 372m transistors.