The phrase is used to refer specifically to content created for video games that is released separately from the main video game release. The phrase has, however, also been used to refer to any type of digital entertainment media distributed online. 
Precursors to DLC
The earliest form of digital distribution in video games was the Atari 2600's Gameline service, which allowed users to download games using a telephone line. A similar service, Sega Channel, allowed for the downloading of games to the Sega Genesis over a cable line.
While the Gameline and Sega Channel services allowed for the distribution of entire titles, they did not offer Downloadable Content for existing titles. Perhaps the closest the services came to offering true DLC was Shiny Entertainment's special edition of Earthworm Jim offered over the Sega Channel, though it too was still a stand-alone download.
On personal computers
As the popularity and speed of internet connections rose, so did the popularity of using the internet for digital distribution of media. User-created game mods and maps were distributed exclusively online, as they were mainly created by people without the infrastructure capable of distributing the content through physical media.
The overwhelming majority of such content was available for free, and the phrase "downloadable content" is rarely used to refer to such content, instead being termed "user-created content." Nonetheless, user-created maps and mods are widely recognized as the precursor to the downloadable content of popular console video games today.
The Dreamcast was the first console to feature online support as a standard; DLC was available, though limited in size due to the narrowband connection and the size limitations of a memory card. These online features were largely considered a failure, and the Dreamcast's immediate competitors, the PlayStation 2 and Nintendo GameCube, did not ship with built-in network adapters.
With the advent of the Xbox, Microsoft was the first company to successfully implement downloadable content. Many original Xbox Live titles, including Splinter Cell, Halo 2, and Ninja Gaiden, offered varying amounts of extra content, available for download through the Xbox Live service. Most of this content, with the notable exception of content for Microsoft-published titles, was available for free.
With the Xbox 360, Microsoft integrated downloadable content more fully into their console, devoting an entire section of the console's user interface to the Xbox Live Marketplace. They also removed the need for credit cards by implementing their own Microsoft Points currency, a strategy that would be adopted by Nintendo with Wii Points and Sony with the PlayStation Network Card.
Sony adopted much of the Xbox Live Marketplace's features into their downloadable hub, the PlayStation Store. With Gran Turismo HD, Sony planned an entirely barebones title, with the idea of requiring the bulk of the content to be purchased separately via many separate online microtransactions.  The project was later canceled. Nintendo has featured a sparser amount of downloadable content on their Wii Shop Channel, the bulk of which is accounted for by digital distribution of emulated Nintendo titles from previous generations.
Music video games such as Guitar Hero and Rock Band have taken significant advantage of downloadable content. Harmonix claimed that Guitar Hero II would feature "more online content than anyone has ever seen in a game to this date", although the release of its successor Guitar Hero III: Legends of Rock pre-empted this claim from coming to fruition. Rock Band features the largest number of downloadable items of any console video game, with a steady number of new songs being added weekly. Acquiring all the downloadable content for Rock Band would cost at least an order of magnitude more than the original cost of the game.
Through use of the Nintendo Wi-Fi Connection users can download DLC to the Nintendo DS handheld for certain games. A good example is Picross DS, in which users can download puzzle 'packs' of classic puzzles from previous Picross games (such as Mario's Picross) as well as downloadable user generated content. Professor Layton and the Curious Village was thought to have 'bonus puzzles' that can be 'downloaded' using the Nintendo Wi-Fi Connection, however connecting to Nintendo Wi-Fi Connection simply unlocked the puzzles which were already stored in the game. Similarly, Moero! Nekketsu Rhythm Damashii Osu! Tatakae! Ouendan 2 had hidden costumes that were unlocked using DS Download Stations for a limited time.
Due to the Nintendo DS's use of cartridges and lack of a hard drive there is limited space for DLC and developers would have to plan for storage space on the cartridge. Picross DS itself only has room for 10 puzzle packs, and Professor Layton's and Ouendan 2's DLC is already on the cartridge and is simply unlocked with a weekly code.
The Nintendo DS's downloadable content is distinct as it is currently being offered at no cost.
Since Microsoft popularized the business model of microtransactions, many people have criticized downloadable content as being too expensive, overpriced, and an incentive for developers to leave items out of the initial release. Some criticism stems from the fact that many of the items sold on sites like Xbox Live Marketplace are not downloadable content at all, but are instead keys used to unlock content already on the game disk, people feel as if they are paying to unlock content they already purchased when they bought the game itself.
Microsoft and Nintendo have been criticized for selling only specific amounts of their currency. For example: if someone wants to purchase a $15 item, they are forced to spend $20 just to buy enough currency to buy the $15 item. Marketplace Points are not equivalent to any currency, however one Wii point is equal to one penny. Both companies have been criticized for taking advantage of currency parity, and keeping consumers from realizing the actual cost of items. Like Disney Dollars, the idea is that gamers will be more ready to spend a certain amount of "points" than a specific dollar amount.
Controversy also appears over the inability to resell the content. Where a normal software disc can have its license sold or traded, DLC is locked to a specific user or console and does not come with the ability to transfer that license to another user.
Criticism arose over the downloadable "Versus Mode" for Resident Evil 5. On Xbox Live the total file size of the pack was 2 Megabytes. Leading people to believe that the Mode was already on the game disc but Capcom chose to offer it as an added extra and request a fee in order for it to be unlocked.
Criticism of Microsoft
Microsoft has especially borne the brunt of criticism regarding downloadable content. They were the first to charge money for it.
Microsoft has since then been known to force developers to release their content at a charge, when the developers would rather release their content for free. Some content has even been withheld from release because the developer refused to charge the amount Microsoft required. Epic Games, a developer known for continual support of their older titles with downloadable maps and updates, believed that releasing free downloadable content over the course of a game's lifetime helped increase sales throughout, and had succeeded well with that business-model in the past, but was forced to implement Microsoft's strategy of fee-based downloads when releasing content for their Microsoft-published game, Gears of War.
- ↑ "http://www.engadget.com/2005/08/05/tivo-adding-downloadable-content-games-internet-radio/". Retrieved on 2008-06-24.
- ↑ "http://xbox.ign.com/articles/531/531106p1.html". Retrieved on 2008-06-24.
- ↑ "http://xbox.ign.com/articles/442/442554p1.html". Retrieved on 2008-06-24.
- ↑ "http://www.videogamer.com/news/21-09-2006-3663.html". Retrieved on 2008-06-24.
- ↑ "hero ii/news-4779.html http://www.videogamer.com/xbox360/guitar hero ii/news-4779.html". Retrieved on 2008-06-24.
- ↑ "IGN: Picross DS". Retrieved on 2008-06-24.
- ↑ "1UP: Picross DS Review". Retrieved on 2008-06-24.
- ↑ "Professor Layton and the not so downloadable content" (2008-03-20). Retrieved on 2008-09-24.
- ↑ "http://www.joystiq.com/2006/11/02/the-xbl-microtransaction-tracker/". Retrieved on 2008-06-24.
- ↑ 10.0 10.1 "Open Mic Night". Penny Arcade (2006-06-26). Retrieved on 2008-06-24.
- ↑ "http://www.joystiq.com/2006/04/03/download-oblivions-horse-armor-for-a-price/". Retrieved on 2008-06-24.
- ↑ "http://www.neogaf.com/forum/showthread.php?t=134598". Retrieved on 2008-06-24.
- ↑ Peace Bunny Perspective: Bad Company
- ↑ 14.0 14.1 14.2 Game Informer, April 2007
- ↑ "http://www.destructoid.com/microsoft-hearts-capitalism-shiny-rocks-does-not-heart-free-content-sunshine-30592.phtml". Retrieved on 2008-06-24.
- ↑ "http://zdmedia.vo.llnwd.net/o1/Podcasts/032307.mp3". Retrieved on 2008-06-24.