The Chumby tends to elicit strong reactions: technologists and gadgeteers love it, everyone else thinks it's kind of useless.
You decide if it's a mere novelty item, or a semi-profound paradigm shift! (see "Why should I care?" for arguments for the latter position)
What does it do?
The Chumby is a mini-computer that connects to the internet via your wireless (WiFi) network. Once connected, it can play internet radio, update you with news feeds, show slide shows from Flickr, report on weather updates, etc.
It has only limited inputs: the screen is touch-sensitive, it can detect motion, and there is a single button on the top. There is no keyboard and so its strength is as a display device akin to a clock radio.
As a user, you assemble "widgets" (small programs with a very specific purpose) into a time series, which is then called a "channel", somewhat akin to a custom television channel. For example, you may design a morning channel with 30 seconds of weather, 1 minute of NPR news feed, 2 minutes of photos from your parents' Flickr account, and 1 minute of live video feed from highway 495.
Is that all it can do?
One of the interesting features of the Chumby is that it is easy to create new widgets, and so a community of Chumby developers has arisen to make new functionality.
So the Chumby can do more and more things every day.
Why should I care?
Will the Chumby survive and thrive or become a quaint "what were they thinking" memory? It's hard to tell: at around $200 (as of early 2009) they're a bit pricey, but they've caught on among a certain crowd. Note that a new, cheaper chumby is out as of November 2009 -- see the update below.
But in the big picture, the Chumby is worth keeping an eye on because it is an early example of an "internet appliance" that uses the information available on the web, but is used and located differently than a traditional computer.
With the advent of the iPhone and the Chumby, we are seeing web content moving away from desktop and laptop computers and into places we don't usually associate with the internet: your pocket, your bedside table, your car, etc.
Moreover, the "sit in a chair at a desk with a display and keyboard and mouse" mode of computer use is quickly breaking down. Consider, for comparison, how the early radios were built like heavy furniture and listeners would gather around the "wireless" in rapt attention. Within a few decades, the radio would be in shower stalls, cars, alarm clocks, and armbands, and listeners would play them in the background while focusing their attention elsewhere.
This represents a recent growing trend: using small devices and wireless technology to use web content in parts of our lives where it is more useful. If the Chumby can be seen as an "internet alarm clock", look for web-enhanced fridges, televisions, cars, house-heating systems, home alarms, etc.
Here is a quick list of the technical feature of the Chumby: 3.5" LCD color touchscreen, two external USB ports, two built-in speakers, headphone output, squeeze sensor, motion sensor, leather casing.
As of November 2009, there is a new chumby on the block, called "The One". It's slightly more powerful and features an FM receiver, a battery, and a much lower price tag - $99. It also has lost its "soggy softball" look in favor of cleaner lines. Here's an article with more details