Chip tunes are a form of computer music created using the internal digital synthezisers of home computers and games consoles. This is not to be confused with other forms of computer music, particularly modules, which are a form of sample sequencing rather than direct synthesis. Chip tunes can however be created using trackers, a technique shared with modules.
Chip tunes are usually instantly recognisable, as they tend to sound... well, like bleepy computer game crap. Quite rightly so, as they are precisely this. The fact that the general hardware is tragically limited makes a good, listenable chip tune into a work of art. If you can make a 3 tone bleeper produce anything but a cacophony, you certainly must be something special.
Thankfully there are plenty of special people out there...
Scene
The demo scene was closely tied to the cracking scene - in fact, it originated from the "intros" crackers would put before a successfully compromised game was loaded. These intros were purely for posterity, and were usually of a limited size so that they could fit on the same media as the original game was distributed. Chip tunes were perfect for the musical score, as they were usually less than a kilobyte in size.
The philosophy of the demo scene was to pump limited hardware for all its worth, and the audio chips on home computers facilitated this idealogy very well. A demo wasn't a demo without a good score, and quite often the music was the main attraction. Before modules, chip tunes would be squelching and squealing their way behind demos, providing coordination and direction for the visuals.
These days the scene is still alive, if not entirely relevant. Radio streams such as Nectarine (http://www.scenemusic.net/) play chip music from user requests, and many other sites carry entire catalogues of chip tunes totalling over 10,000 individual files. Groups, bands and collectives such 8bitpeoples carry the torch for chip music, releasing new tracks which hold their ground even against the software synth spoiled masses on the Internet. Emulators provide the platform for musicians to compose on without having to buy new machines (although many use genuine hardware), while standalone players and plugins allow us to listen to the tunes without having to download an emulator or MP3 encoding of the song.
Chip tunes occasionally appear even in commercial music. Remember the Kernkraft 400 track "Zombie Nation", which featured a C64 rendered main hook? Apoptygma Berzerk and Gigi D'Agostino are also particularly fond of this chip, which can be heard mixed into many of their works.
In fact, some people are making a living from chip tunes. HardSID, for instance, is a commercial sound card which features an actual SID chip from the C64. Similar hardware and actual synths exist for other chips, such as the ZX Spectrum's AY.
SID
(Commodore 64, Commodore 128)
The SID was one of the pioneers of chip music. Designed by the man who founded Ensoniq, the SID chip was a real style synthesizer, with ADSR envelopes, 4 waveforms, low/high/band-pass filters, a notch reject filter, and ring modulators.
AY-3-8912
(ZX Spectrum 128, MSX, Atari ST, Intellivision, Vectrex)
Capable of 4096 different tones and featuring an ADSR envelope, the AY was quite popular in the European demo scene. A clever hack was used to play PCM samples by quickly turning the white noise channels on and off whilst varying the volume.
MIDI?
It is often asked whether MIDI files, the small ".mid" files containing notes and timings to be played back by the PC's sound card synth or external hardware, are in fact chip tunes. Opinions do differ, but the general consensus is that they are not. A MIDI file contains data about which notes are played, much like sheet music. Chip tunes on the other hand are raw instructions and data directly controlling a music chip. A chip tune should always sound the same, and is directed at specific hardware so that it can take advantage of the its particular properties. MIDI files might be similar in that they cause digital synths to play a tune, but they certainly don't share the philosophy, character and scene appeal of chip tunes.
Thanks to Wikipedia and World of Spectrum for various snippets of tech information.