Walkthrough of Apple's iMessage in iOS 5
One of the surprising new iOS 5 features announced during the WWDC 2011 keynote was the introduction of Apple's own messaging service called iMessage. The new service offers a number of advantages over current SMS/text messaging. Features include delivery receipts, see when someone's typing, secure encryption and support for iPad and iPod Touch devices. iMessage also circumvents the costly text messaging plans required by carriers. According to DaringFireball, Apple's mobile carrier partners only learned about the new feature at the same time as the rest of us: during the keynote.
Cult of Mac has posted a nice walkthrough explaining how iMessages work alongside standard SMS messages.
Fortunately, for the end user, the transition will be relatively transparent. iMessage has been integrated into the existing "Messages" app. If you would like to text someone, iOS 5 automatically checks to see if they are eligible to receive iMessages rather than the more costly standard text message:

Once a contact is known to support iMessage, a special blue chat bubble appears by that contact's name to indicate they support iMessage. If you don't want to ever send any standard text messages, there is a preference for Messages to only try to send iMessages instead of SMSs. In summary:
Overall, iMessages are great. Being able to see when a message has been delivered and whether it's been read or not really enhance the communication experience. The best part is that you don't have to even think about them because if Apple is doing all of the work completely behind the scenes so that you won't even notice. Using iMessages on multiple devices with the new support of iCloud ensures that you'll never miss a beat when you're working on both your iPad and iPhone.
Apple previewed iOS 5 during the WWDC 2011 keynote on Monday. iOS 5 is presently available as a beta to registered developers but won't be released to the public until this fall.
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Top Rated Comments
But if you just go to text and the iPhone's like "Hey, they have an iPhone...don't worry this one's free!" then that is seriously bad-ass.
Are you kidding? AT&T's text messages cost $1,310 per Megabyte. Thats pretty darn costly.
Tell me about it. This whole text message fee from the phone companies is nothing more than collusion on their parts to fix prices. They all get to squeeze $5 extra out of every customer per month. It adds up.
The data for text messages should be covered by either the phone plan or the data plan. This is ridiculous.
The green is there to remind you that the carriers are raping your hard earned green dollars when you text over their SMS service. The blue is on Apple's service to let you know everything's cool. :p
His point is that you are paying $20 a month for something that realistically costs the provider pennies a month in support. An SMS is a fraction of a MB, if not a kB. It's the easiest money a comm company can make.
I also don't know why you think there is going to be an explosion of data usage. No music streaming, and I'm sure most of the syncing will be Wifi only (home network near computer) with the explicit option to choose the data delivery method for such operations.
That being said, it's not as if this is anything new. Carriers have supported BB's implementation of the same type of feature for years without fuss.