In response to customer feedback, Steam will now allow you to share "digital games among friends and family members, just as current retail games, books, DVDs, and other physical media can be shared".
Once one device (out of a total of ten) is authorized, the lender's library is accessible so the user on the new device can download and play any game from the library. There are some minor catches, though. Simultaneous usage of a library is not allowed, so if the lender decides to play the game that another authorized device is playing, the friend will be have only a few minutes to either buy the game themselves, or quit playing. This is likely to deter friends doing this just to be able to play online in a game together but only purchasing one copy between them.
Since I'm sure there are a lot of questions, Valve has graciously passed along this FAQ to go with this announcement.
I want to try this! How can I join the Family Sharing Beta?
To express interest in beta participation, join the Family Sharing Group on the Steam community. The Family Sharing beta will begin in about a week, when a thousand Steam accounts from this group will be granted access to share their Steam libraries. You'll know you've been selected when you receive an email from Steam inviting you to try out the new feature.
How do I enable Family Sharing on my computer?
Family Sharing is enabled in one of two ways: You can either locally enable sharing in Account Settings, with Family Sharing & Devices, or remotely respond to a user's Steam request to share your previously installed games via email.
Is there a limit to the number of devices I can authorize to share my Library?
Yes. A Steam account may authorize Family Sharing on up to 10 devices at a given time.
Can I share specific games, or do I have to share my whole library?
Libraries are shared and borrowed in their entirety.
Can all Steam games be shared with friends and family?
No, due to technical limitations, some Steam games may be unavailable for sharing. For example, titles that require an additional third-party key, account, or subscription in order to play cannot be shared among friends and family.
Can a friend and I share a library and both play at the same time?
No, a shared library may only be accessed by one user at a time.
When I authorize a device to lend my library to others, do I limit my own ability to access and play my games?
As the lender, you may always access and play your games at any time. If you decide to start playing when a friend is already playing one of your games, he/she will be given a few minutes to either purchase the game or quit playing.
Sometimes the games I've borrowed are unavailable for me to play. Why?
Borrowed games are only available on computers that have been authorized by the lender. A borrowed game will not be available on a computer running an OS unsupported by that game. Borrowed games may also be unavailable if the lender's library is currently in use on another computer.
Who owns the DLC and in-game content associated with a borrowed title?
A borrower will have access to the lender's DLC, but borrowers may not purchase DLC for a base game they don't own. Any player may purchase, trade, earn, or otherwise acquire in-game content while playing a game, but in-game items cannot be shared between accounts. These items remain associated with the account that purchased or acquired them, whether borrowing or lending the base game.
Can region-restricted content be shared across regions?
No, any region restrictions will remain in place when borrowing or lending content.
Will I be punished for any cheating or fraud conducted by other users while playing my games?
Your Family Sharing privileges may be revoked if your library is used by borrowers to conduct cheating or fraud. We recommend you only authorize familiar computers you know to be secure.