Vocaloids are pieces of software that produce synthesized voices that can be used to create music. The people who provide the voices are often Japanese voice actors and actresses. In order to promote these pieces of software, the designers came up with mascot characters to represent what the owners of the voices look like.
It's become very popular among Japanese fans (and a growing number of foreign fans) to make videos using the Vocaloid voices as well as sometimes using the likenesses of the corresponding Vocaloid characters. A lot of these videos show up on the website Nico Nico Douga. The community is very much user-built and new songs come from within the community. The Vocaloid itself is a voice instrument a music composer can add to his or her songs, and the fact that it comes with a character attached helps the author ascribe a certain "feeling" to a song that it couldn't have with a faceless voice.
If you are familiar with the band Gorillaz, it's similar except that in this case anyone who wanted to could produce and share music using the band members' images and voices, and of course Vocaloids are a lot cuter.