External Content type allows you to make seamless interface between SharePoint 2010 and external data storage (ie. SQL server). Using External Content type, you can create an External List which stores the data to predefined storage. You can imagine of having a table with SharePoint list interface.
To create an External Content type, you need SharePoint Designer 2010. If you curious enough, the External Content type is enhancement of Business Data Connector (BDC) in previous version.