Oh it’s really rather simple once you look at it from all the right angles! Here’s a nice little visual representation of the “Messenger Relay” system of which sends and receives all your messages. I’ve basic’d it down as much as I can because it does get tricky in places. Click the thumbnail to view a larger shot.

1. The user starts the session by double clicking a contact.
2. The user’s Windows Live ID credentials are sent across to the Windows Live ID Credentials server for further verification
3. The information is passed through a incoming only firewall to the dispatch server. This is the first point of connection for the message being sent.
4. Depending where the user is in the world, a connection will be made to the local notification server. There are main ones in Singapore, Dublic, Redmond and Reading. This keeps the connection between the two users alive, and keeps things updated such as user status, chat requests and email notifications from Windows Live Mail/Hotmail.
5. The message itself doesn’t go near the notification servers – it is passed onto the switchboard server which is the where all the messages and files are exchanged. The user starting the chat can talk to one user, whilst using another switchboard session to talk to someone else, and another switchboard session for someone else still – without even knowing it. Invitations, file transfers and video/voice chat are also sent through here.
6. The information is then relayed back through an outgoing firewall and checks the user is still online. If the user is offline by the time the message is ready to be received, then it’ll bounce back and be saved on the switchboard session until the user logs back on again. If they are online, they will receive the message.
This is all done in the space of around 2 seconds – most of the time your message will be sent at least twice around the world, in the space of 2 seconds. Not bad eh?
Source: MSblog.org